For business people, buying – or selling – a business can be the opportunity to realize your dreams, whether it’s embarking on a new entrepreneurial adventure or planning your retirement. Be sure that you have your bases covered, both legally and with other advisors, to help bring that dream to reality.
If you are thinking of buying or selling a business, you should first assemble a strong team of professionals to guide and advise you on what may be one of the most important transactions of your life.
This team should include a trusted business broker who understands the market. For the seller, a broker can help avoid the “rookie errors” of trying to go it alone and act as a much needed buffer between the buyer and seller. For the prospective purchaser, brokers frequently look to add qualified potential purchasers to their rosters, so as a prospective purchaser you may be a welcome addition to their database.
Buyers and sellers should have a strong relationship with a business banker who can guide them through the process of financing. Buyers in a competitive bid for a business have a distinct advantage if their financing is locked in place prior to the start of negotiations. There is also the matter of business banking, lines of credit and other financial tools that business owners should have at the ready.
Another key team member is the CPA, who knows the ins and outs of tax laws, how to advise on what is a reasonable value of a business and who can work with sellers and purchasers throughout the entire process, including the critical due diligence component. An insurance professional is another valued team member who can advise as to needed coverage (workers’ compensation, liability, cyber insurance, and more).
Completing the list is a business attorney who will protect your interests, whether you are a buyer or a seller.
Here are a few points to consider.
1. Confidentiality rules! Whether it’s an owner considering a sale or a buyer making a bid, rumors of a pending sale can have a negative effect on employees, vendors and customers. All negotiations and discussions must be conducted in the utmost of secrecy until an agreement has been reached, and perhaps even until the transaction has closed. An important safeguard is the nondisclosure agreement (NDA) for all parties: buyers, sellers, and trusted team members.
2. Have a clear understanding of what is included in any sale. What licenses, permits and approvals are necessary to run the business? Are they transferable or will the buyer need to obtain his/her own? Are there contracts with existing customers in place to increase the likelihood that they remain customers of the buyer? Is there real estate that goes with the transaction? If so, is it leased or owned? If leased, will the buyer be able to assume the existing lease? Will the key employees remain with the entity? Are there employment agreements or contracts to confirm this? What intellectual property goes with the sale? For every business, there are unique circumstances and it is vital to spell out in as much detail as possible what is included and what is not.
3. What will the relationship be between the buyer and seller post-sale? Will the purchaser want the former owner to remain for a period of time to assure a smooth transition? A key part of transactions include non-solicitation and/or non-compete covenants. Part of the value of a business is the assurance that the former owner will not compete against the new owner, so non-competes are very common and usually specify a period of time and a geographic region. A non-solicitation would spell out what the former owner cannot additionally do, such as doing business with former customers (even outside of the geographic range of the non-compete) or hiring former employees. Each situation is unique and the documents should reflect that uniqueness.
4. From a financial standpoint, will the transaction be a stock deal or an asset deal? What are the pros and cons of each? Is there an up-front payment or earn out over time? Will there be any seller financing? Your attorney and CPA can advise jointly on this one.
5. Contractual agreement. Everyone always hopes and expects that once finalized and the deal is concluded, everyone will live happily ever after, but it is important to have a contractual agreement in place for how to resolve disputes that may arise, and they can arise for any number of conditions.
Marc Clerc is the founder and owner of Clerc & Associates, P.C. (http://clercandassociates.com), a practice specializing in the purchase and sale of businesses and business law, with offices located in South Easton.
