What Business Owners Should Know When Selling A Business
When planning to sell a business, a business owner should first engage legal counsel and possibly a business broker. Legal counsel will assist in understanding the legal aspects of the sale transaction and ensure that all necessary legal requirements and documents are in place. They will also help protect the owner’s interests and mitigate any potential legal risks. The business broker, on the other hand, can be instrumental in finding potential buyers, setting a fair market price, and assisting with certain negotiations with the buyer.
Once a team of professionals has been assembled, the next step is to prepare the business for sale. This process, also known as ‘staging’, involves tidying up financial records, resolving any outstanding issues, improving the visual appeal of the premises, and ensuring that operations are running smoothly. This will enhance the perceived value of the business and increase its attractiveness to potential buyers.
The third step involves performing a thorough valuation of the business. This can be done through various methods such as cash flow analysis, comparison with similar businesses, or using industry-specific valuation models. The objective is to determine a fair and realistic asking price that can be justified to potential buyers.
After the valuation, the next step is to create a comprehensive information memorandum that describes the business and its operations in detail. This document should include financial statements, a description of the products or services offered, an overview of the market and competition, details about the management team, and any other relevant information that would be of interest to potential buyers.
Simultaneously, it is necessary to develop marketing materials to advertise the sale of the business. These materials could include brochures, flyers, or online listings, and they should be designed to highlight the unique selling points of the business and attract potential buyers.
Once everything is prepared, the next step is to actively market the business and engage with potential buyers. This involves presenting the business to potential buyers, answering their questions, and entering into negotiations with serious prospects. It’s important to maintain confidentiality during this process to protect the business’s ongoing operations and customer relationships.
Finally, when a suitable buyer has been found and a price has been agreed upon, the final step is to close the sale. This involves signing a sales agreement, transferring ownership, and possibly assisting the new owner with a transition period. Throughout the process, the business owner must maintain clear and open communication with all parties involved to ensure a smooth and successful transaction.
Selecting The Appropriate Valuation Method
Determining a fair purchase price for a small to medium-sized business involves choosing an appropriate valuation method, which can be a complex process. This decision is pivotal as it affects how attractive the business will appear to potential buyers and what the owner can expect to receive from the sale.
Firstly, business owners need to understand that different valuation methods are suited to different types of businesses. For example, the earnings multiplier or discounted cash flow (DCF) methods, which rely heavily on the predictability of future profits, may be suitable for businesses with steady cash flows. The asset-based approach, which values the business based on the value of its net assets, could be appropriate for businesses with significant tangible assets, such as real estate or heavy equipment.
Secondly, owners need to consider the industry standards and norms. Certain industries tend to favor specific valuation methods, and deviation from these norms may lead to potential buyers questioning the valuation. Business brokers and industry experts can provide guidance on what is customary in a given industry.
Thirdly, the selected valuation method should reflect the business’s unique characteristics. For instance, if the business has a robust brand or patented technology, these intangible assets could add considerable value, which might not be captured in a straightforward asset-based valuation. Here, an income-based approach or even a royalty relief method, which is based on the hypothetical royalties the business could save by owning the intellectual property, might be more suitable.
Additionally, business owners should consider the market conditions and the likely pool of buyers when choosing a valuation method. If the market is strong and the business is likely to attract strategic buyers who could gain significant synergies from the acquisition, it might be justifiable to use a more optimistic valuation method.
Finally, it is crucial to engage a professional valuator who is knowledgeable in the chosen valuation method. This expert can help ensure the accuracy of the valuation and can also provide valuable advice during the negotiation process. Valuation is as much art as it is science, and the experience and judgment of a professional can greatly enhance the credibility of the valuation.
Preparing the Letter of Intent (LOI)
A Letter of Intent (LOI), sometimes referred to as a “term sheet” or “memorandum of understanding,” is typically a non-binding document that outlines the basic terms and conditions under which the buyer is willing to purchase the business. It serves as a roadmap for the deal, setting the stage for subsequent negotiations and due diligence.
Typically, an LOI starts by identifying the buyer and the seller and describing the business being sold. This includes basic information such as the legal name of the business, its location, and its nature of operation. It will then detail the proposed transaction structure, whether it’s an asset purchase, a stock purchase, joint venture, or a merger. This is important because the structure of the deal can significantly impact the legal and tax implications for both parties.
The LOI will also state the proposed purchase price and how it will be paid. This could be a lump-sum payment, an installment plan, or a combination of both. It might also include earn-outs or other contingent payments based on the future performance of the business. The LOI may specify the assets and liabilities included in the transaction, along with any excluded assets.
Furthermore, the LOI often outlines the proposed timeline for the transaction, setting key dates for due diligence, signing of the definitive purchase agreement, and the closing date. It usually includes confidentiality clauses, specifying that both parties will keep the details of the negotiation private. It may also contain an exclusivity or ‘no-shop’ clause, which prevents the seller from seeking out or entertaining offers from other potential buyers during a specified period.
Importantly, an LOI usually states that it is non-binding, meaning that either party can walk away from the transaction without legal consequence (with certain possible exceptions, such as confidentiality and no-shop clauses which are often binding). This allows both the buyer and the seller to negotiate in good faith, knowing that they are not yet legally committed to the deal.
While an LOI does not finalize the sale, it does indicate serious intent and can save time and resources by establishing basic terms before proceeding to more detailed negotiations and due diligence.
Contact Our Chicago Business Attorneys
We understand that every merger or acquisition represents not only a significant financial transaction but also a crucial strategic decision that can shape the future of your business. Whether you are an entrepreneur looking to purchase a business, a professional aiming to expand your practice, or a business owner considering the acquisition of a competitor, our experienced business attorneys can provide you with the guidance and expertise you need to navigate the complex process with confidence.
We offer a suite of M&A services, from conducting thorough due diligence to negotiating deal terms, drafting comprehensive agreements, and securing regulatory approvals. Our team is equipped with the knowledge and experience to address your specific challenges and to help you capitalize on your opportunities.
We would be delighted to learn more about your business and M&A needs and to discuss how our services can add value to your transaction. We encourage you to reach out to us to schedule a consultation. It only takes a minute to complete our contact form, and our attorneys make every effort to respond to all inquiries.