Engagement of Business Brokers
Business brokers or brokerage firms that sell businesses may or may not be engaged to assist in the marketing and negotiation of the sale of the company. In other words, it is not required that a business owner selling a business engage a business broker as the business owner may choose to market and negotiate the sale on their own, in collaboration with their team of professionals. Business brokers primarily focus on connecting the buyer and seller and once the acquisition process begins, they generally step back to let the parties professional advisors consummate the deal. The business brokers compensation is typically a percentage of the total purchase price ranging from 10% – 15%. Broker fees are negotiable and the seller should engage a business attorney before signing any broker contract.
Letter of Intent
At some point during the early stages of the acquisition, one or both parties will want ta more concrete understanding of the terms of the sale of the proposed acquisition. A seller will want to know whether the buyer has in mind a purchase price and structure of a deal that will be acceptable and will be reluctant to continue to disclose its business secrets until a letter of intent (or a memorandum of understanding) is negotiated and executed. The letter of intent is generally a more formal document that is signed by the parties. Therefore, it is extremely important to be careful and precise in the drafting of the letter of intent in order to avoid issues where the parties mutual understandings of the deal were not aligned.
Preparation of the Business’ Organizational Documents
Most businesses, whether it is organized as a limited liability company or a corporation, will already have in place the necessary Illinois business organization documents reflecting how the internal operations and affairs of the company are operated and structured. However, some businesses, especially small businesses, have not maintained the businesses organizational documents over the years. These organizational documents, such as the operating agreement, bylaws, shareholder agreement, articles of organization, articles of incorporation, sales agreements, client agreements, and the like, need to be updated to reflect the current internal operations and affairs of the company. The business owner must engage a corporate lawyer prior to beginning the acquisition process to ensure the business’ house is in order, so to speak. This is often overlooked and can be detrimental if it delays or even kills the deal because the organizational documents were not in order.
Preparation of the Business Financials
A potential buyer will likely want to receive up to five years’ worth of profit and loss statements, bank statements, tax returns, commercial leases, customer or client contracts, vendor and supplier contracts, among other business financial documents. These business documents will be requested by the potential buyer during the early stages of the acquisition so it is critically important that these documents are appropriately prepared and do not contain any misleading statements. If this is accomplished, the potential buyer will know they are working with a well-managed company.
Valuing the Business: Purchase Price
After the decision to sell a business has been made, a business owner must determine the purchase price. There are many factors that can go into calculating the purchase price. At the end of the day, a business will sell for an amount that a potential buyer is willing to pay for the business. Business lawyers generally do not have the training and experience to be the client’s primary advisor on valuation. That said, there are a number of ways a business may be valued. The three most common methods include: 1) the income approach, 2) the asset-based approach, and the 3) market approach. Regardless of the valuation method the seller uses, the seller needs to know not only what price they will be willing to accept, but what range of offers to expect. The seller therefor needs to ask the same question a prospective buyer would ask: what is the business really worth? Again, similar to a parcel of real estate, a business is worth whatever price an informed, willing buyer will pay. But it is important to distinguish the purchase price the seller is willing to accept from the valuation. These two amounts often times do not exactly line-up.
One of the most valuable assets of any business is its intellectual property. Therefore, it is critical in the preliminary planning stages of the acquisition that the buyer conduct a thorough due diligence of the target business’ intellectual property. Our Chicago trademark lawyers regularly provide counsel to buyers and sellers in this area. These intellectual property assets could include copyright, patents, trademarks, trade secrets, licenses, and domain names.
Noncompete Agreements And Other Restrictive Covenants
It is not uncommon that a prospective buyer will want to incorporate a noncompete and other restrictive covenants in the transaction documents. These restrictive covenants, specifically the noncompete, must be carefully analyzed. Generally the prospective buyer will want to prevent the seller from competing with the acquiring entity for 3-5 years in a specific geographic territory, usually a radius around where the business currently conducts its business and where its operations may naturally expand. An additional monetary amount should be provided to the seller if they will be prevented from engaging in any business that may be competitive to the acquiring company.
Seller’s Transition Services
It is important for the seller to consider during the early planning stages of the acquisition if they will be willing to provide transition services to the seller post-closing. Generally the prospective buyer will want the seller to provide certain consulting services after the deal has been consummated because the seller understands the intimate details of the business’ customers and operations better than anyone. The seller’s transition services may be provided for no compensation or the acquiring company may hire the seller for a period of time as an employee or independent contractor. It is not uncommon for the prospective buyer to pay certain compensation beyond the target purchase price for the seller’s transition services.
Call Our Chicago Corporate Attorneys
Our Chicago corporate attorneys have significant experience in handling a wide range of business transactions, including representing individuals and businesses selling a business in Illinois. To schedule a consultation with one of our business attorneys today, please contact us via email, online or give us a call at 312-789-5676.