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What do I need to do before I buy or sell a business?

Posted by Nicole Call | Oct 13, 2020 | 0 Comments

Buying or Selling a Business?

Buying or selling a business is both exciting and terrifying at the same time. As a seller, you'll want to take steps to protect yourself by creating distance from the business, as well as, future liabilities related to the business. As a buyer, you'll want to make sure you limit your liabilities as best you can by engaging in due diligence - so you know exactly what you're buying - no future surprises. 

SELLING A BUSINESS

(1) Decide What You are Selling.

Before offering your business, you'll want to decide: 

  • Are you selling the assets or the entity?

    • "Selling the Assets" means you're selling the business' intellectual property, e.g., patents, copyrights, trade secrets, the equipment owned by the business, etc.
    • "Selling the Entity" means you're selling the entire business "lock stock and barrel" - everything - including the goodwill (aka reputation and brand), ownership interest, the assets and liabilities of the business, etc. 

Sellers typically prefer to make a clean break and sell the entire business.

Buyers oftentimes are cautious to purchase an entity because of the unknown  . . . unidentified problems with the business. 

(2) Button Everything Up Tight

To show value to a potential buyer that supports the business valuation – as a seller - you'll want to get your ducks in a row by making sure you're compliant with requirements. You wouldn't want to lose a potential buyer just because you missed a filing deadline, failed to pay a fee, failed to make annual filings, or something else easy to fix. So, you'll want to:

  • Verify your initial and annual registration with the state to make sure you're in good standing

  • Gather corporate formation documents, e.g., 

    • Articles of Organization (limited liability companies) or Articles of Incorporation and Bylaws (corporation) and Amendments
    • Operating Agreement or similar document and Amendments
    • Capital Contributions Sheet and Amendments
    • Certificates of Interest, Units, Shares, Stocks, etc.
  • Gather records that reflect you've maintained the corporate veil, e.g.,

    • Minutes of business meetings, including Organization Meeting, Annual Meeting and Notices or Waiver of Notice (if applicable)
    • Record of Certificates 
    • Approval of Transaction(s) Benefitting Members (if applicable)
    • Approval of Loan(s) to Business (if applicable)
  • Gather records that reflect your efforts to comply with laws, e.g.,

    • Employer Manual
    • Employee Handbook
    • Company Policies and Procedures, e .g., accounts payable, accounts receivable, customer service, etc.
    • Business License
  • Gather Relevant Agreements, e.g.,

    • Employment Agreements
    • Lease Agreement(s)
    • Shareholder Agreements (corporations)
    • Customer Agreements
    • Independent Contractor Agreements
    • Marketing Agreements
    • Vendor Agreements
    • Supplier Agreements
    • Distribution Agreements
    • Purchase Order Agreements
    • Any other agreements that will be binding on buyer or create potential ongoing liability
  • Records reflecting your business owns what it is selling, e.g.,

    • Intellectual property filings
    • Purchase Agreements
    • Titles
    • Annual property tax filings
    • Any other record that reflects ownership

(3) Create a Seller Memo

A Seller Memo generally includes information about:

  • The products or services the business offers,
  • How the business operates,
  • The management structure,
  • An organizational chart that includes descriptions of the positions and the employees currently working in those positions, 
  • The purchase price,
  • Business ongoing obligations, e.g., lease(s), real property, etc.
  • Exclusions, and
  • Any other relevant details. 

(4) Business Valuation by a Professional Familiar with your Industry

This is a critical piece in selling a business - determining what the business is worth.

Although you might think it is worth a certain amount - that may or may not be true. An independent, third-party business valuation should be conducted by a professional who is familiar with the industry or industries your business operates. A professional will ask for all of the documents referred to above (and more like, tax returns, profit and loss statements, balance sheets, etc.). So, you'll be glad that you went to the effort to "button everything up tight" before bringing in a professional to value your business. 

Before showing this to anyone - make sure to have a signed Confidentiality Agreement in hand. 

BUYING A BUSINESS

If you've found a business, you're interested in buying you can never engage in too much due diligence. You'll likely have to sign a Confidentiality Agreement, but it's worth it to get a good look under the hood before you buy. At a minimum, you'll want to:

(1) Ask for and Review the Seller Memo.

As stated earlier, a Seller Memo generally includes information about:

  • The products or services the business offers,
  • How the business operates,
  • The management structure,
  • An organizational chart that includes descriptions of the positions and the employees currently working in those positions, 
  • The purchase price,
  • Business ongoing obligations, e.g., lease(s), real property, etc.
  • Exclusions, and
  • Any other relevant details. 

(2) Inspect the Business Records, e.g.,

  • Review corporate formation documents, e.g.,

    • Articles of Organization (limited liability companies) or Articles of Incorporation and Bylaws (corporation) and Amendments
    • Operating Agreement or similar document and Amendments
    • Capital Contributions Sheet and Amendments
    • Certificates of Interest, Units, Shares, Stocks, etc.
  • Review records that reflect seller has maintained the corporate veil, e.g.,

    • Minutes of business meetings, including Organization Meeting, Annual Meeting and Notices or Waiver of Notice (if applicable)
    • Record of Certificates 
    • Approval of Transaction(s) Benefitting Members (if applicable)
    • Approval of Loan(s) to Business (if applicable), etc.
  • Review records that reflect seller's efforts to comply with laws, e.g.,

    • Employer Manual
    • Employee Handbook
    • Company Policies and Procedures, e .g., accounts payable, accounts receivable, customer service, etc.
    • Business License
  • Review records reflecting the business owns what it is selling, e.g.,

    • Intellectual property filings
    • Purchase Agreements
    • Titles
    • Annual real and/or personal property tax filings
    • Any other record that reflects ownership
  • Review financial records, e.g., 

    • Intellectual property filings
    • Purchase Agreements
    • Accounts Receivable
    • Accounts payable
    • Annual reports
    • Tax returns
    • Profit and loss statements
    • Balance sheets
    • Audit reports
    • Valuation Report, etc.

(3) Investigate Business and Key Individuals, e.g.,

To learn more about the seller(s) and the business, especially the goodwill and the business' reputation, its helpful to have an outsider perspective from those who have dealt with the business. Explain to the seller that you would like to reach out to vendors, customers, business partners, etc. Ask seller's permission and make sure you comply with the Confidentiality Agreement (you should've signed). 

An online search can be quite revealing, e.g., consumer protection entities like federal and state consumer protection entities like Trade Commission, Consumer Protection, Securities, Attorney General's Office, licensing, state registration, and private consumer protection entities like the Better Business Bureau, etc. Now is the time to know – not later – when it's too late to do anything about it.

NEGOTIATE THE TERMS

Whether you're the buyer or seller, negotiating the terms is an essential step, and oftentimes the buyer or seller may be too close to the situation . . . thus… not the best for this job. Hiring an attorney to assist in both buying and selling a business can be helpful in negotiating with their head (not their heart). Terms often negotiated include:

  • The purchase price
  • The accuracy of what is included, e.g., assets, liabilities, etc.
  • Warranty
  • Financing
  • Lease / Sublease Agreements
  • Anything else that has come up during due diligence phase.

BUY SELL AGREEMENT

The Buy Sell Agreement is a contract that provide the details for the terms of the sale. The Buy Sell Agreement is absolutely critical to protecting the interests of both the buyer and the seller. Some details that should be included are:

  • The identity of both the seller and buyer
  • The scope of the sale (discussed above – assets or entity)
  • Purchase Price
  • Financing
  • Closing date
  • Responsibilities of both parties prior to closing
  • Representations of both seller and buyer
  • Warranties of both parties
  • Indemnifications
  • Non-Compete Agreements
  • Confidentiality Agreements, etc.

Hopefully, this provides you some steps to follow as you embark on the exciting journey of buying or selling a business.

Of course, if you are buying or selling a business, bizLAWgic is here to serve you. For a custom quote, please fill out the contact form.

About the Author

Nicole Call

BIZLAWGIC is the brainchild of Nicole R. Call, who has been active in the legal profession for two decades. In that time, she has served: businesses, nonprofits, quasi-governmental entities, governmental entities, judges, and individuals. With this wealth of experience she provides unique insight in meeting small businesses legal needs.

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