The Process For The Sale Or Purchase Of A Business
Note: For the purchase or sale of a franchise, which has some different and/or additional steps, see the Farrell Law Group, P.C. brochure, "How to Buy or Sell a Franchised Business", which also appears on the Farrell Law Group, P.C. website.
Q: How do you determine what a fair price is for the business?
A: There are many aspects to how a "fair market value" price for a business is determined, and we cannot explore valuation concepts in depth in this format. In summary: a good starting point is to discuss valuing the business with your CPA. He or she should have some good concepts to consider as a starting point; do an internet search to get some additional valuation concepts, possibly including for the particular type of business being valued; depending on the size of the business [it may not make financial sense to have a formal appraisal of a small business with annual sales of under $750,000-$1,000,000] you may want to have a formal valuation/appraisal of the business that can be used to support valuation negotiations for either a buyer of seller. What type, if any, of financing that a seller may offer for the purchase price payment, or other particular benefits that a buyer may get from a deal, can, and usually do, have a significant impact on the value of the business. There are no "hard and fast" rules that govern business valuations. Ultimately, "the price of a thing is what it will bring".
Q: Where do I start if I want to sell my business?
A: First, you need to find a "ready, willing and able" buyer. Initial negotiations will occur, after which a preliminary agreement between you, and the prospective buyer, will be reached. That preliminary agreement may be, and often is, put into writing as a "letter of intent" ["LOI"]. The LOI generally sets out the terms of the preliminary agreement, the intention of the parties to move a possible sale forward, and will expressly provide that the LOI agreements are dependent on a future full written "asset purchase agreement" ["APA"] being signed by the buyer and the seller by some identified date in the future, and after the "due diligence" process is completed by the prospective buyer. If the date for completion of the DD process, all follow-up negotiations, and signing of an APA arrives and the APA is not finalized, the LOI expires, and the parties will not proceed further, unless they agree to an extension of the LOI final date.
Q: What does the "due diligence" ["DD"] process consist of?
A: This depends on the type and size of the business being sold. The LOI should require that all DD information provided to a buyer be strictly confidential. All financial records, operating records, leases, agreements with suppliers, customers, employee agreements, determination of key employees to be retained [or terminated], etc., should be fully reviewed during the DD process in order to insure that the buyer, his counsel, and financial advisors, are fully informed about the history and present operations, and financial aspects, of the business being bought, and confirm the buyer's perceived value of the business. DD can take a few days, or many weeks. Sellers should provide all documents requested to insure that the prospective buyer is fully informed regarding the deal. If a seller fails to disclose all relevant information to a prospective buyer, the seller becomes exposed to significant legal liability if the deal is completed based on the partial or incorrect information supplied to a buyer.
Q: After the completion of the DD process what occurs?
A: Depending on the outcome of the DD process, further negotiations often occur regarding price, financing of the deal, and other aspects of the prospective sale. As discussed above, the terms of the LOI will set a date by which those negotiations occurring after DD, and signing of the APA, must be completed by. If those additional negotiations are successful, and the parties continue to proceed, the seller's [but sometimes the buyer's] lawyers prepare the initial draft APA. The APA is a much more comprehensive agreement setting out, specifically, all terms of the deal, lists completely the assets being sold, price, payment terms, etc. Significant negotiations will often precede the completion of the final APA.
Q: What are the most important terms of an APA?
A: Since no one can accurately predict what problems/issues may come up in the future, after the business transfer occurs, all parts of the APA should be considered to be important. However, the most important provisions contained in any APA are: identifying fully the assets/rights being sold/bought; price; payment for the price [which may include money paid to the buyer over time under a note]; security for any note that is part of the purchase price; allocation for tax purposes of the purchase price among the assets being bought; confirmation that the seller will have no continuing liability or obligations regarding the business after the sale is complete, or, provisions stating specifically what rights and/or obligations the seller and the buyer will have after the completion of the sale; non-competition agreement [i.e. agreement that the seller cannot go into competition with the buyer in a similar business after the sale]; employment agreements [if the seller, or seller's employees is going to provide assistance, or be employed by the buyer, after the sale occurs]. This summary is certainly not exhaustive, and each deal will depend on its own facts.
Q: How does the sale proceed after the APA is signed?
A. The APA will set out the chronology of the deal moving forward to completion of the sale. This will include the completion of any actions that the deal is dependant on [e.g. financing being finalized; assignment of leases regarding the business being agreed to by landlords; vendor agreements being assumed; etc.]. When the closing date agreed to in the APA approaches, lawyers for the buyer and the seller will be working cooperatively on the final "closing documents" to implement and finalize the deal.
Q: How is the sale completed?
A: A "closing" occurs at which all documents implementing the sale are signed, funds transferred, and any other necessary actions taken to complete the deal. The closing may be a more "formal" affair where all of the parties and their lawyers attend, or it may take place by transmittal and signing of the documents electronically, or by any other process that results in the completion of the deal. After the closing occurs, the buyer takes over the assets of the business, and the provisions of the APA are enforced.
The content of this material is provided for general informational purposes only, and should not be considered to be the giving of legal advice. Any such legal advice provided by The Farrell Law Group, P.C., and its attorneys, is dependent upon a full review of the facts and circumstances relating to any business sale or purchase, and requires that a prior written agreement of legal retention be entered into.