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Summer 2001 Selling Your Business: Part 1

Getting Ready

First, get a lawyer. You need an experienced business attorney on your team early in the game to review the overall picture of your business and advise you on how best to carry out the transaction. Also call your accountant. The CPA who handles your business finances can also play an important role, particularly when it comes to issues such as the value of the business, and the tax implications of the sale. And if you don’t already have a buyer, you may want to involve a business broker to help you market the business.

Setting the price

Once you’ve decided to sell, your initial focus will be to set the sale price. Ultimately, the sale price is what a qualified buyer will pay. But you want the price you set to be a “good” price for you, and an “attractive” price to potential buyers. This is an inexact science at best, since in most instances there won’t be a ready market nor, unlike home sales, easy price comparisons of whatothers have paid for comparable businesses in size and type. Price can be determined in many ways, including consideration of the business’s cash flow, hard and soft assets, overall financial condition (including debt structure), and the buyer’s and seller’s expectations. An accountant, business appraiser or business broker can help determine a fair and realistic price.

Be prepared

To maximize the sale price, you need to prepare the business for sale. This means not only sprucing up its physical appearance, but tidying up your business records, too. You want to make it as attractive and easy to navigate as possible for potential buyers. For example, minimize outstanding debts and other liabilities as much as possible. Keep in mind that they don’t want to buy your debts, or other headaches like unresolved legal action. Any pending lawsuits or other potential stumbling blocks should be addressed and, if possible, finalized.

Depending on the form of sale, if you lease the space for your business, you need to review your lease and contact your leasing agent or landlord to eliminate potential problems associated with a new owner taking over. Some leases have restrictions on assignments. Do the same with any equipment leases that will be transferred to the new owner.

If you borrowed money to build and finance your business, inform your lender of your intention to sell. Your bank likely has a “security interest” or lien on all of your property to secure repayment of any debt. The bank may waive those liens in order to accommodate the needs of the transaction—that is, to help you make the sale. In fact, even if you’re not selling it’s a good business practice to maintain a good relationship with your banker and to keep them aware of developments in your business so that they can meet your needs.

Your employees should be told of your intent to sell as early as possible. In many circumstances, concerns over confidentiality may prevent you from telling them until the transaction is fairly well cemented. However, the grapevine can spread false news about the condition of the business and the pending sale, which can undermine your efforts to maximize the sale price. Moreover, some of your employees may need to work with you and your lawyer, accountant, etc., in the preparation stages, and may be required to undertake tasks that are outside their normal duties. You may want to give them special compensation for those efforts.

Also take a critical look at your operation to see whether any employees are essential to the continued success of the business. If so, consider whether they should receive special compensation for staying on after the sale. The logic behind these “stay bonuses” is that those employees enhance the value of the business, and thus are rewarded for assisting your efforts to sell and adding to the sale price. Each of those targeted employees receives the bonus (which come out of the purchase price) if the employee is still working for the business for a predetermined period after the sale.

“Forms” of sale

Several “forms” or types of sale of a business are possible, determined in part by how your company is structured. If your business is a corporation, a limited liability company (LLC) or a partnership, determine whether you’re going to sell your interest in the company (for example, the shares of a corporation), or simply the assets of the company.

Because sellers typically want to wash their hands of the entire business when they sell, they usually prefer a stock sale. If you sell your shares, the business entity continues to live on, but it’s owned by a different person. That means that the assets as well as the liabilities of the company transfer to the responsibility of the buyer, although you may have continuing liability for any debts you have personally guaranteed.

Buyers, on the other hand, want to purchase a company with as few liabilities as possible. So they usually prefer to purchase assets. So if you only sell the company’s assets (such as the inventory, fixtures, business name), the corporate entity still exists in your hands, although at that point it may only be a shell. When a business is sold through a sale of assets, the liabilities generally remain the seller’s responsibility, unless there’s a specific agreement to the contrary. And, of course, there are tax implications associated with each form of sale.

Selling a business isn’t easy—it’s a more complex and multi-faceted issue than most people realize. You have to do it right. So to avoid financial and/or legal complications, consult with your lawyer and your and accountant to help you decide the form of sale that’s right for you.

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