Where to start when selling your business?
The first thing to determine when you’re selling your business is its true value. A fair market value should include the value of equipment, name recognition, on-going sales contracts, just to name a few. Each industry will have its own assets and supplies. For example, a beauty shop might have a large stock of consumer products they sell to customers. On the other hand, a roofing company would have a large stock of raw materials that are sold once installed. Beyond the physical assets of the particular business, other items can carry a great deal of value. Items such as the phone number, the website, and any Goodwill associated with the name, might add additional value. Ongoing customer contracts, if transferable, might mean built-in future revenue for a brand-new owner. Occasionally, someone selling their business will use the services of a business valuator. A professional valuator should have the education and the experience with your specific type of business. They would have the resources to compare your items to other companies similarly situated and determine the market value. When the seller’s price differs from the buyer’s price, often times they will each hire their own valuator. These differing price points are normally negotiated, item by item, to arrive at a sales price acceptable to all. The itemized pricing will be valuable in creating the Allocation Exhibit to the sales documents. How the prices are allocated can have enormous tax ramifications, hence, allocation is usually negotiated between the parties.
What’s for Sale?
Selling a business is usually done on either an APA (Asset Purchase Agreement) or a SPA (Stock Purchase Agreement). When selling a business, it could be selling off the assets or selling the whole business in its entirety. Many factors go into this decision and sometimes it’s a decision made between the buyer and seller during their discussions.
An example of when to use an APA when selling your business is when its being purchased by a competitor. In this case, the buyer already has consumer recognition and other infrastructure in place. Here, they would only want to buy your business assets, such as equipment and supplies, hence ‘Asset Purchase’ Agreement. They wouldn’t want to buy your website, company name, nor take on your liabilities. An important factor here is whether or not your assets have underlying liabilities attached to them. If so, they can’t just be sold without first settling the attachment(s). How and when those attachments, or liens, are satisfied can have very serious ramifications if not handled properly. The balance might be satisfied at closing with sale proceeds or the attachment might be assignable with lender prior approval. A third possibility is the lender might have a specific clause mandating the procedure within the lending documents. When selling your business, best practice is to consult an experienced business attorney before you’re exposed to financial penalties.
On the other hand, if your business has consumer recognition, continuing accounts receivable, it might have more value if left intact. This option also arises when the owners have decided to retire and are ready to go do something else. When selling a business with liabilities that are supported by accounts receivable, a stock sale might be seller’s best option. For these and a host of other reasons, the seller is selling the business in its entirety. With a stock sale, the buyer takes everything, the good with the bad. Assets, cash on hand, website, Goodwill, trade secrets, debts, and liabilities are all included in the sale. Each of the assets and liabilities should be carefully examined by a business attorney prior to agreeing to purchase. Any terms and conditions attached to any given asset, or liability, may not be palatable to a potential buyer. Everyone has their own thresholds, especially when conducting business.
When selling your business, in addition to the sales agreement, most businesses will need to review their existing contracts. Customer contracts may or may not be assignable and even if they are, the customer may elect to terminate instead. Some may elect termination, providing the contract allows for it, in hopes of negotiating a better deal with the new owner. Should enough customers elect termination over assignment, it may affect the negotiated purchase price between the buyer & seller. Contracts securing debt require working with the lender to see what, if any, options exist for debt transference. When working with financial institutions, the new business owner would likely have to qualify in their own right, separate and apart from the seller. Here, the buyer will have to provide financial statements, evidence of good credit, and many other qualifying items. However, some supply and equipment liabilities have been known to be assignable. It completely depends on the individual lender and their company policies, which would be stated in the lending documentation. Each provision in a security document should be strictly adhered to, with any deviations supported by additional signed approval(s). Penalties for failure to adhere to security documents can produce devastating, costly, and unintended outcomes.
Know What’s Involved In Selling Your Business
The contract for selling any business, whether it is an APA or an SPA, varies widely. It depends what all needs to be included or excluded. A small business may only need a few pages, while the sale of a radio station took reams of paper. Whether there are customer contracts, software agreements, copyright assignments, or any number of other items will have to be addressed. If there is land, governmental approvals required, or liens to be addressed would all be documented and accounted for. Or, the person selling the business may be presented with the buyer’s contract for purchase. On its face, someone else drafting the paperwork might appear to be a cost savings, it usually isn’t. The people they paid will write it to their best interests, which are usually different from your best interests.
Should you want or need assistance selling your business, please call Susan Larsen at 303.520.6030.