Buying or selling a business is a daunting task for most people. With careful planning and preparation and some help from the right professionals, however, you can demonstrate the full value of your business and maximize your profit.
In this article, we will cover the basics of buying or selling a small business in Texas, including:
- A checklist for selling your business,
- How to prepare your business for sale,
- How to perform due diligence before purchasing a business,
- The types of professionals who can help to maximize your profit, and
- How your business law attorney can help you throughout the process.
Checklist for Buying or Selling a Small Business in Texas
If you are considering buying or selling a business, your first step is to make a checklist – you should consider the items below as a starting point and add tasks that are unique to your situation as you go.
Some of the information in this article applies to sellers, and other information applies to buyers, but both buyers and sellers must be aware of the process and requirements to make your sale or purchase as smooth and painless as possible.
Prepare for the Sale of Your Business
Planning and preparation for the sale of your business should begin as soon as possible. If you want your business to be attractive to potential buyers, your business documents and financial records need to be in order, and you must be prepared to demonstrate that your business is solid and profitable.
Get your financial statements audited each year, review your business’ accounting, identify your business’ strengths and weaknesses, and address the weaknesses before your business goes on the market.
Depending on the nature of your business and its strengths and weaknesses, you should consider retaining advisors who can help you to prepare your business for a potential sale including:
- Sales consultants,
- Business coaches,
- HR consultants,
- Investment bankers,
- Corporate lawyers, and
- IP attorneys.
Determine the Value of Your Business
You will need a realistic estimate of the value of your business – buyers are not likely to pay an arbitrary price for your business, and they are going to want to see documentation of how much your business is worth and why.
Retain a business valuation expert who can review your business’ performance, records, and current market conditions and who can provide a solid appraisal that will strengthen your bargaining position.
What is Included in the Sale?
What will be included in the business sale? Do you intend to sell the corporate entity, the assets that are owned by the corporate entity, or both?
Assets or Entity
Some business sales will include the business’ assets only – this is an attractive option for some buyers, but it has benefits and drawbacks.
For the seller, it allows the company to continue operations if that is the goal. This option also means that the company retains all the corporation’s liabilities – the buyer will not assume the former company’s debts. This makes sense for some buyers when the assets are the most important part of the transfer, and the buyer is not interested in acquiring the corporate name (and liabilities).
With an entity sale, the buyer purchases both the corporate entity and takes on the corporation’s liabilities. In many cases, the corporate name, goodwill, and existing customers are the most important part of the transfer.
Internet Marketing, Websites, and Telephone Numbers
Will the corporation also transfer its websites, telephone numbers, and marketing contracts?
In many cases, the goodwill and client base of a business are fueled by the company’s website and internet marketing operations, and the telephone numbers used by the business are an important source of repeat customers. The details of the transfer of websites, blogs, telephone numbers, logos, and other intellectual property must be clearly defined in the sales agreement.
Consider Using a Business Broker
Maybe you have potential buyers lining up to take over your business operations. If not, you should consider retaining a business broker or investment banker who has experience in testing the market, locating the right buyers for your business, and maximizing your sales price.
Pre-Qualify Potential Buyers
Most sales of small businesses are financed with third-party loans, and, when a sale falls through, it is usually because the buyer was unable to secure the necessary financing.
To avoid this problem, you should consider requiring your potential buyers to pre-qualify for financing before beginning the process of negotiations and closing the deal.
After the letter of intent is signed, the buyer will begin their due diligence period, which should include a careful review of the business’ operations. The buyer should examine, and the seller should have prepared for examination, the company’s:
- Existing business contracts,
- Patents and other intellectual property,
- Employment issues,
- Benefits plans,
- Financial statements,
- Tax returns, and
- All other relevant aspects of the business.
For the seller, this is where careful preparation and planning pays off – if potential buyers see unsigned contracts, sloppy bookkeeping, or issues with employees, or if you cannot competently answer the buyer’s questions about your business operations, they are not likely to be interested in taking on your liabilities.
How Your Business Law Attorney Can Help
Your Texas business law attorney can help with the purchase or sale of your business at every stage of the process, beginning with a review of your business contracts, intellectual property rights, assets, and liabilities to prepare for the sale and maximize your potential profit.
Other tasks that may require consultation with your corporate attorney include:
Letter of Intent
The letter of intent is a critical stage in the purchase or sale of a business. The buyer will draft the LOI which will include the price and details of the sale, and the seller can then negotiate the proposed terms and make counteroffers as required. Both buyer and seller should engage corporate counsel to help prepare and negotiate the LOI.
Business Documents and Review
Your business law attorney should assist you with reviewing and preparing documents associated with the sale including:
- Federal and state tax documents for the sale of the business and assets like company-owned vehicles,
- Financial documents including the purchase agreement, insurance documents, succession agreements for employee benefit plans, asset transfers, lease transfers, and loan documents including promissory notes, security agreements, and UCC financing statements when required, and
- Notifications to SOS, IRS, and DOR – changes to the company’s ownership, dissolution, or changes to the corporate structure will need to be updated with the Secretary of State’s Office, the IRS, and the Department of Revenue.
Closing the Deal
Your business law attorney will review all agreements and documents before closing to ensure that everything is in order, your interests are protected, and the closing happens as smoothly as possible.
Your attorney will prepare all closing documents, obtain all required signatures, and finalize the purchase or sale of your business.
Please feel free to contact one of our Murray Lobb attorneys to obtain our legal advice regarding the purchase or sale of your business. We also remain available to help you with all your general business, corporate, and estate planning needs.