Business owners will all, at some point, face the challenge of selling their business. Whether the change comes as a result of reaching retirement age or the fact that you have grown your business to the extent that a third party chooses to acquire it, the general process remains the same. The business owner may wish to consult with one or more of the following professionals for guidance: business broker, accountant, and/or attorney.
First, most purchasers prefer to buy assets and few, if any, liabilities of your company. This structure gives the buyer a fresh start, decreases the buyer’s risks because contingent liabilities are excluded, and results in a stepped-up basis in those assets for tax purposes. On the other hand, asset sales typically require obtaining the consent of a number of third parties, such as lessors, lenders, and supply vendors. Almost every contract to which a business owner is a party will contain an anti-assignment clause. Even if the assignment of a contract is permitted, you must obtain the prior written consent of the other party. A due diligence review of all contracts will be necessary to ascertain their assignability. Adding these additional parties to the mix, not only lengthens the time frame to reach closing, but also may place the seller in a weaker bargaining position, if the buyer wants changes made to the contracts. Other drawbacks to the asset purchase structure from the seller’s perspective include: titled assets must each be individually re-titled (e.g., real property, vehicles, and intellectual property such as patents and trademarks); seller’s guarantees must be removed or replaced; and the parties must resolve their conflicting views on how to allocate the purchase price among the assets and the seller’s personal goodwill.
Sellers normally prefer to structure the sale of their business as a direct transfer of some or all of their ownership interests. Since the entity owning the business remains the same, the assignability issue is avoided, unless the contract contains a “change in control” provision. The assets so acquired will have a “carryover” tax basis. Moreover, an ownership interest transfer could potentially require compliance with state and federal securities laws, so the buyer will need to find an exemption to such laws or even obtain a legal opinion that the ownership interests in your business do not constitute a “security.” A “stock” buyer will need to perform a more in depth due diligence review of your business because the buyer will be assuming your liabilities too. A compromise position is for the seller to indemnify the buyer for liabilities associated with actions or inactions that occurred prior to the closing date. To make such a compromise feasible, a portion of the purchase price may have to be escrowed to secure such contingent liabilities or the seller may be forced to personally guarantee those potential liabilities.
Once the acquisition transaction structure has been determined, both buyer and seller will delve into relevant confidential information concerning the other party to evaluate the desirability of completing the transaction. Generally, the buyer will need substantially more detailed information than the seller, especially if the seller is receiving the purchase price in cash. However, if the seller will receive his or her compensation in the form of an ownership interest in the buyer, both parties will want extensive information about the other. A checklist of the categories of information that the parties should review is set forth below.
- Organization documents for the entity, together with all amendments
- Financial statements, audit letters and tax returns
- Books and records of the entity
- Major contracts
- Real property deeds and/or leases
- Pending or threatened litigation
- Governmental compliance & permit requirements
- Major customers and suppliers
- Employment terms for employees that will be retained
- Intellectual property rights
- Environmental issues
- Lien searches for counties and states where entity does business
- Inspection of the business facilities
- Listing and condition of machinery, equipment and inventory
- Listing of accounts receivable
- Guarantee Agreements
- Required approvals and consents
In addition, depending on whether or not the seller will continue to be involved in the business, satisfactory consulting or employment agreements, in the first instance, or non-compete, in the later instance, should also be executed.
Selling your business can create a “win-win” based on the parties engaging in a methodical and realistic due diligence review of your company.