Many business owners eventually reach a stage where they want to sell the fruits of their labor and retire or move on to other ventures. Navigating this process can be confusing, stressful, and fraught with pitfalls, especially for first time sellers. Here are the basics of what any successful business owner should know about navigating the sale of their business.
- KNOW YOUR VALUE
Knowing your worth is not as easy as looking at your cash-flow statement or EBITDA numbers. Other items such as recurring revenue, the value of experienced employees, long-term contracts, patents or other intellectual property, customer and vendor lists, and other aspects of the business can add value. Consider obtaining a valuation from a specialized accounting or valuation firm to ensure that your asking price accurately reflects your worth. An experienced attorney will have recommendations for accountants that specialize in business valuations for the sale of a business.
- FIND AN EXPERIENCED ATTORNEY
Get an attorney who regularly works on buying and selling businesses, not the attorney who helped you purchase real estate property or navigate a human resources issue. Would you let a foot surgeon do your heart surgery? Probably not, you would prefer to have a heart specialist perform your heart surgery. So, let a mergers and acquisitions specialist help you with the sale of your business (“mergers and acquisitions” or “M&A” refers to attorneys who focus on buying and selling businesses). This is one of the biggest financial decisions of your life. You should have experienced counsel working with you.
- FIND YOUR BUYER
If you have not identified a buyer yet, consider engaging an investment banker or business broker to help connect you with a buyer. But first, ask your attorney if they know an interested buyer. A mergers and acquisitions attorney will know plenty of potential buyers and may be able to directly connect you, saving you the substantial commission that a broker would have charged.
- If you do engage a business broker, have your attorney review your contract. You simply don’t know what you don’t know. For example, rather than a flat percentage of the sale, brokers will often agree to one percentage fee up to a certain purchase price and a much lower percentage on any purchase price above that threshold. Another example for broker agreements is the discussion of a “tail.” Often, even after you terminate your contract with the broker, the broker will receive their commission on any sale for a period of time after termination—whether the broker helped on the transaction or not. At a minimum, your attorney will help you negotiate what is reasonable and comports with market standards.
- GET YOUR ATTORNEY INVOLVED BEFORE THE LOI IS EXECUTED
It is imperative that your attorney help you negotiate the Letter of Intent (LOI) because they can help guide you regarding customary terms and options and potentially provide alternatives you have not considered. The inclusion of more terms in the LOI can help decrease the amount of attorney’s fees required for drafting and negotiation later in the deal process. Further, it is advantageous to have as many terms as possible agreed upon in the LOI stage because you will not have to “trade” for those terms later.
For example, you negotiated the “business terms” for the letter of intent before you engage an experienced attorney. After you have signed the LOI, your attorney tells you it is common to ask for a cap on your liability. However, a cap was not included in the LOI. The buyer might say, “Well that wasn’t in the LOI,” and your attorney will have to argue that it is a prevailing market norm to have a cap. The buyer might eventually agree to a cap, but only if you agree to a change that they want. The more terms you can cement in the LOI, the less you may have to give in “trades” later.
- FIND THE MOST TAX-EFFICIENT STRUCTURE
Your attorney will work with your tax accountant and the buyer to structure the sale in the most tax-efficient manner. It is advisable to have this conversation at the LOI stage of the transaction.
WHAT WE CAN DO FOR YOU
At Ferguson Braswell Fraser Kubasta PC, our experienced mergers and acquisitions lawyers are passionate about helping our clients navigate the sale of a business and would be happy to:
- Review your proposed LOI and give you feedback.
- Refer someone to help with your business valuation.
- Connect you with a potential buyer we may know.
- Negotiate a detailed LOI that minimizes your risk.
- Structure the transaction in a tax-efficient matter.
- Confer with our estate-planning attorneys to assure you reach your ultimate financial goals and assist with planning for your future.
- Involve our real estate specialists, intellectual property attorneys, and employment attorneys to help handle all specialized aspects of your transaction.
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