I'm Ready to Sell My Business: What Should I Expect?

There comes a time in the life cycle of every business where it becomes necessary—or maybe just desirable—for the ownership of the business to change hands. For some business owners, that time arises simply because they feel it is time to do something else, they’ve received an offer that can’t be refused, or because of changes in market conditions. For a growing number of American business owners, sometimes that time comes because retirement is imminent. If you’re an owner looking to sell, regardless of whether you’re selling to a longtime employee, a family member, a competitor, or an outside investor, you may be wondering what to expect when selling your business.

This article will provide a brief snapshot of some of the stages and items of a business transaction that sellers can expect to come across during their transaction once a buyer or potential buyer has been identified (we’ll refer to both as the “Buyer” for purposes of this article).

1. Letter of Intent. Once a prospective Buyer has been identified, oftentimes the first document to be negotiated is the letter of intent, or LOI. The LOI is generally a non-binding document between the Buyer and the Seller, outlining the key terms of the transaction. What is the purchase price? Will the deal be a purchase of all of the assets of the business or a purchase of the owner’s stock or membership interest? What other key terms will be part of the deal that should be worked out at a high level early on? While by no means required, a strong LOI can anchor negotiations of the much more extensive purchase agreement, and can save both parties time and money by identifying areas of disagreement or potential issues early in the process.

2. Due Diligence. The Buyer has likely conducted initial, informal due diligence on the business prior to execution of the LOI (if there indeed is an LOI). However, at some point during the transaction, whether after the LOI is executed, after the purchase agreement is executed, during negotiation of the purchase agreement, or some combination thereof, the Buyer will conduct more formal due diligence of the Seller’s business. Generally, Buyers will seek (among other things that may be specific to the sale) the Seller’s financial statements, contracts, information on employees and material customers and suppliers, the Seller’s debt, and any other relevant information concerning the Seller’s business. The scope of due diligence may depend on the nature of the business, the size of the transaction, and the Buyer’s risk tolerance.

3. Purchase Agreement. The purchase agreement, whether it be a Stock Purchase Agreement, Membership Interest Purchase Agreement, or most commonly an asset purchase agreement, is the most extensive legal document in the transaction process. It is the document whereby the Buyer agrees to purchase, and the Seller agrees to sell, the underlying business. However, the document serves as much more than that from a legal standpoint. The purchase agreement will contain the terms of the transaction, and include among other items the ultimate purchase price (with any adjustments), any contingencies (for financing, satisfaction of debt, execution of ancillary documents, or otherwise), representations and warranties made by the Seller to the Buyer (and vice versa, albeit to a much lesser extent), indemnification and hold harmless language, restrictive covenants, and many other material terms. Purchase agreements are typically either closed simultaneous to their execution, or with a delayed closing while due diligence or other contingencies are satisfied.

4. Financing. While Sellers may think that obtaining financing is the Buyer’s issue, it oftentimes becomes a Seller issue as well. If the Buyer is obtaining third party financing, whether from a bank or other lender, that lender will want to do its own due diligence on the transaction as well, and may ask for the same materials that the Buyer has previously asked for as well as additional documents to help get the loan approved. It is best practice for a Seller to be organized during this process so as not to slow the financing process, and thus the deal. Additionally, the transaction may entail the Seller being paid a portion of the purchase price via a promissory note over time, commonly referred to as “seller financing”.

5. Closing. While the purchase agreement may be the agreement by the parties to buy and sell, the closing is when the actual of the assets or stock, as applicable, occurs, and the balance of the purchase price is paid. Any documents not yet signed, whether it be the actual purchase agreement, a bill of sale, non-competition agreement, assignment of contracts, are typically signed at the closing. For most transactions, the closing may mark the end of the Seller’s journey as the owner and operator of the business, whereas the Buyer is only beginning.

6. Post-Closing. In certain transactions, there may be post-closing items that occur that will require the Seller’s attention. If the Seller retained accounts receivable, it will need to collect them. The Seller may also need to render post-closing services to the Buyer for a period of time, change the name of the Seller’s entity (if an asset sale), or true-up any discrepancies between expected and actual working capital. Further, it is not unusual for part of the purchase price to be paid out after closing, whether via the aforementioned Seller promissory note, via an “earn-out” tied to the production of the business, or via payment of an amount of the purchase price placed into escrow.

These are only a taste of what the Seller can expect to confront during the transaction process, and are by no means an exhaustive list. There will be tax considerations, other legal considerations, as well as non-legal and business considerations to address.

If you are ready to sell your business, or considering doing so and need legal representation to assist with the drafting, negotiation, feel free to contact Austin Stevenson at RAStevenson@strausstroy.com , or at 513-768-9745.

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