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Small Business Buying and Selling: The Process

Posted by sb_admin on August 11, 2010
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Whether you’re selling or buying a business, it can prove to be daunting task.  Because there are certain procedures you must follow and documents you must complete, in most cases, it’s vital that you seek the help of an intermediary that specializes in buying and selling.  They will be able to guide you through this overwhelming process.

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Generally, the purchase or sale of a business will be in the form of one of these:

Asset purchase – Where the buyer purchases some or all of the seller’s assets.  Buyers like this form of purchase because they often receive equipment and inventory, without taking on the seller’s debts and various liabilities.

Stock purchase – Where the buyer purchases all or most of the seller’s stock.  This purchase is beneficial to the seller because the buyer assumes all of the seller’s debts and liabilities.

Merger – Where two companies unite to form a single, brand new company. This transaction is favored by both the buyer and the seller because it usually entails a tax-free swap of stock in the new company for stock of the old or “merged” company.

Consulting an Expert

It’s a smart idea to get an intermediary involved in the process, as early on as possible.  The process of buying and selling is often too difficult to deal with by yourself.

Pre-Negotiation

Here are some things you should know and discuss with your consultant before negotiations with the other party starts:

  • Seller’s financial condition – Make sure you look at balance sheets and profit and loss statements, etc.
  • Pricing – The minimum price the seller is willing to accept, and the maximum price the purchaser is willing to pay.
  • Valuation – How the value of the business was calculated

Preliminary Negotiations

In this stage, the buyer and the seller should discuss the following matters:

  • Whether any contracts require third-party approval before the buyer can take them over – for instance, leases and loan agreements.  Set a specific date and time by which approval must be obtained.
  • Documents that are needed, but were not examined in the previous stage, like federal and state income tax returns for the past five years, real property and equipment leases, union contracts, and employment contracts for key employees.
  • If any key employees of the seller will be kept by the buyer. If so, the buyer may have to draft new employment contracts, and if not, the seller might have to compensate those employees – if the deal goes through, that is.
  • If shareholders’ and/or board of directors’ approval is required, determine the latest date on which the approval must be made.
  • If any government approval is required, which shows that a business was properly created and authorized to do business–determine which party is responsible for gaining this approval.

Letter of intent – (written during preliminary negotiations) Shows that the parties are serious about the deal. It helps make sure that they don’t waste time and money performing due diligence and negotiating a formal agreement.  Usually, they’re “non-binding,” though, you can’t force the other party to buy or sell based upon the letter.

What the letter should contain…

  • The exact length of time that both of the parties are willing to keep the deal open
  • A binding promise by the seller not to negotiate a sale with any other prospective purchaser for a certain period of time
  • A binding promise by the purchaser not to discuss trade secrets, and other sensitive company information – called a confidentiality agreement.

Due diligence – (also done during the preliminary negotiation stage) it is an in-depth examination of all the aspects of the seller, such as their liabilities and assets.  The point is to make sure that the company is truly legit, and proves to be everything it says that it is.

Formal Agreement & Pre-Closing

A formal agreement is what ends the negotiations.  The formal agreement contains all the details of the deal, including the price, the date when the business will be turned over, etc. Often, the agreement goes through many drafts, and it’s not finalized and signed until the closing stage.

These are the things that should be addressed during the pre-closing:

  • Definitive Agreement
  • Make sure all contracts and loans can be assigned or subleased to the buyer
  • Count and inspect inventory if included in the sale

Closing

Closing is when the deal is completed.  This is a paper-intensive process. At this time, you’ll have to do things like:

  • Make sure all documents are signed, and notarized by the specified deadline (such as for deeds and lease assignments)
  • Disburse sales proceeds by paying…
  1. Creditors
  2. The balance to the seller
  3. Unpaid sales taxes
  • Record documents such as deeds, and certificate of title to motor vehicles

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