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*Disclaimer: If you are watching this video, please keep in mind that Elevate Business Law has been changed to The Legal Department for Service Professionals, PA.

So, if you are thinking about selling your business, or you want to know what the process is like. I’m going to be talking about the mechanics of selling your business in this video. There are four general stages to selling your business and these don’t all have to be in this order, but the first stage is usually the letter of intent. The letter of intent stage is the introduction with the seller and the buyer. Generally, the brokers, if you have brokers involved, will be transferring communications back and forth. They’ll be representing the seller and maybe there’ll be a broker representing the buyer. The buyer will reach out to the seller and say, “I want to know more about your business.” Usually, there’s a nondisclosure agreement signed by the buyer at this stage so that the buyer can get more information that might be confidential about the business. Then the buyer will submit a letter of intent and the negotiations take off from there.

Stage two is what’s called due diligence. This is when the buyer gets to know the business a little bit better, looks under the hood, and checks out different things that they’re concerned about. Stage three is where the purchase agreement comes into play. And this is where the documents get signed or negotiated. And then stage four is the closing. This is where the title and ownership of the business get transferred. So, let’s first talk about stage one, the letter of intent. It’s often called an LOI, and if you are using a broker at this stage, sometimes a purchase agreement can be used as the letter of intent. But the general purpose of the letter of intent is to say, are we close enough in terms to move forward with this deal? The seller has thought about what the seller wants out of the deal with the purchase price, the terms, the timing, and what’s being sold. The buyer has come in knowing what the buyer wants, what kind of price they’re willing to pay, and how they’re willing to pay it. So the letter of intent process is to see if these two match, which will set the tone for how the buyer and seller negotiate the deal terms as they go.

So maybe the seller has advertised the business for sale at a certain price and the buyer comes in and offers a slightly lower price. There may be several rounds of back-and-forth talking about the price. There could be other terms, for example – how long is the seller going to hang around and help the buyer transition into the business? This is sometimes a consulting issue, sometimes the buyer wants to actually employ the seller after the sale to make sure that they’re around and can help educate them to make a smooth transition with employees and clients. The brokers are involved at this stage. Sometimes if two businesses or a seller and a buyer don’t have a broker involved, they negotiate directly with each other. This is not as common with small businesses, but it does happen. Having a broker does help the process, it allows for there to be a separation between the buyer and the seller so that there’s not as much emotion involved in the decision-making. The broker is the interface, maybe it’s one broker, maybe it’s two brokers one on each side. But they do have a role to play in the process and they are very valuable in their skills, and finding a good one can help the deal run very smoothly.

This is also the time when the seller looks at the buyer and says, “Is this a serious buyer? Are they qualified? Is this someone I want to transfer my business to?” Keep in mind, there’s an emotional component to this. Sellers have spent a lot of time, money, energy, commitment, and sacrifice in building their business. They don’t want to just pass it off to anybody. They want to see who this person is! They may ask, “Do they have the same values as I have? Will they take care of the business? Will they keep it running? Will they take care of the employees and treat the customers right?” So that’s a big issue during the stage and then the financing arrangements.

Obviously, the big-ticket item in the room is “How much money and how fast will you pay me?” So there are several different arrangements for financing, and sometimes we get very creative with this. Sometimes a buyer comes to the table with a cash deal, and they’ll give the seller the full purchase price in cash. Other times, which is more common, there’s some sort of a financing arrangement. Either it’s through a bank, through the seller (sometimes the seller will accept payments instead of one lump sum) and of course, that’s a debt represented by a promissory note with interest attached. And so, there are different arrangements, whether the seller will accept those arrangements is determined at this stage.

So, let’s say now you’ve got the deal terms all negotiated, how it’s going to be paid, the seller likes the buyer, the buyer likes the business, and the big-ticket items are settled at this stage. Now we go into due diligence, and what that means is the buyer gets to come in and really dig into the business. Most of the time they look at financials, and they’ll look at contracts with customers or clients. If it’s a product-based business, they’ll look at how the product is made. If it’s a service-based business, they’ll look at the employees, there are all kinds of things that go on during due diligence and sometimes attorneys are involved in this stage, sometimes they’re not, depending on the size of the business, the type of the business, the personalities of the buyer and the seller but some of the big pitfalls during this stage is to make sure that the seller is providing the buyer with enough information to make an educated decision. The seller at this stage should never hold back any documents or information for fear that it will scare the buyer off. Everything needs to be put on the table at this stage because there are legal repercussions later down the line if the seller has held back some information. So, it’s very important, to be honest, and direct. Be responsible with your communications at this stage.

There are deadlines, this stage doesn’t go on forever. There has to be a time that it ends and this is determined usually in the letter of intent stage that the buyer might have two weeks of due diligence, three weeks, or two months. It depends on the business and how long due diligence is, but there is a definite cutoff for due diligence and once that cutoff happens, the buyer then has to decide, is he or she going forward with the deal. Have they seen everything that they feel comfortable with? Have there been any red flags? Are there any dangers? Are they uncertain? At this point, the buyer has to decide whether they’re moving forward. If the buyer is still good, it goes into the next stage.

 If the buyer is not good after due diligence, there can be two things that happen. One is the deal just dies, and the buyer walks away and says, “I’ve seen things I don’t like and this is not for me.” The second thing that could happen is the buyer comes back to the seller and says, “You know what, when we negotiated in stage one, I didn’t know these facts. I didn’t know these things and now that I do, the deal has changed for me. I may be willing to go forward, but we’re going to change a couple of these deal terms to make me feel comfortable.” And so there may be price negotiations at this stage (that rarely happens), sometimes there’s a little bit of financing negotiations, and any number of other negotiations pertaining to items the buyer might feel uncertain about.

Now, there is a difference in due diligence between the two types of sales. There are two ways to sell your business, you can sell the assets of your business, or you can sell the interest in an LLC or the stock in a corporation. The difference in due diligence for these two types is – in an asset sale, the buyer is going to look at the holistic picture of the business. They’re going to look at pretty much everything. The interest stock sale goes deeper. They’re going to look at the past behavior of the business, past loans, past employees, lawsuits, and other liabilities that could sneak up on them two, three, or four years down the road and be a surprise.

If we get through the due diligence stage, we move into the purchase agreement stage. If the purchase agreement has been used as a letter of intent (and this is the case most of the time) if you’re using a broker, the purchase agreement then comes back into play. If it needs to be revised from the due diligence negotiations, that’s done at that stage. If you use a true letter of intent during stage one, during this stage, the purchase agreement would be drafted, and this is when the attorneys start getting really involved. They draft the agreements to match the terms that have been negotiated between the buyer and the seller. The buyer should have his or her own attorney and the seller should have his or her own attorney as well. These attorneys represent each party separately and look out for their interests. During this time, things such as the asset sales come into play. There are certain documents that are produced and drafted for the asset sale. One of which is, “What are the assets?” You must define the assets and you must be very specific sometimes on what is being sold and what is being kept

If you’re doing an interest or stock sale, there’s official action that must be taken by that business entity. Some of those internal documents will need to be drafted. You must consider certain title transfers. How are we going to transfer the title? If there are vehicles in the business or if there’s real estate in the business, at this stage, all those things are starting to get ironed out. Also, during this stage, there are representations and warranties. This relates back to what I mentioned in the due diligence stage. The seller represents and warrants to the buyer certain provisions. One of which is the seller says, “I promise you that everything I’ve told you and provided to you is accurate and valid. If it’s not, I will be responsible for the repercussions, and any damages that flow from that. I also promise you that the assets are in good condition and that all my employees are happy and won’t sue you.” The list goes on and on. “I’ve paid all my taxes, I’ve done all these things, right.” And if the seller cannot make those representations and warranties, it’s disclosed at this stage as well.

The indemnification is partnered very closely with the reps and warranties and basically, it says, “If you buy or suffer any damages or losses, because of something I have done, I will indemnify you, I will pay you for those losses.” Those are two provisions in almost every deal that are highly negotiated, because those are the big-ticket liabilities that could come out for the buyer in the future, but also for the seller in the future. And then if there are other documents that need to be prepared for closing, it’s done at this stage.

And then stage four is closing. Most of the time, you’re sitting at a table, a buyer and a seller come to the table, and they pass the papers around the table, and everyone signs. The key to closing is timing. So, usually either in the letter of intent stage, or even sometimes in the purchase agreement stage, the date of closing will be set and it will either say no sooner than a particular date, or it’ll say no later than a particular date, or it could even say the parties agree that it’s going to be on or around a date. Sometimes closing dates get moved, sometimes they get moved up, and more often they get moved back because things must be prepared, documents have to be prepared, the title has to be investigated, and there are other things that go on to make the closing happen. Usually, the buyer and the seller are physically present, and they sign the documents and when they get up from the table, the ownership has transferred. It is no longer owned by the seller; it is now owned by the buyer.

The receipt of funds is done at that point as well. Most of the time it’s done by wire transfer, sometimes it can be done by check, and sometimes the funds can be held in escrow. Sometimes the bank is cutting the check. It can be a different way of paying, but at this point in time, funds are paid. Then, and this is very important, not only is ownership important to transfer, but the operation of the business is also very important to transfer. So please keep in mind considerations such as keys, keys to the office, keys to storage, passwords, where you have things located, their filing system, and passwords for online accounts, all types of things must be transferred to make the operation runs smoothly between the seller and the buyer. And again, that’s an important piece of why the seller stays on afterward for a period of days to help the buyer transition. And there you have the mechanics of a sale.

If you are looking to buy or sell a business and would like our help, please reach out to schedule a free 30-minute introductory meeting at 904-860-3111 or email [email protected]