Selling Your Business for Biggest Return
By Isabel Gram, JD | November 9, 2018
Someone wants to buy my business. Now what?
My name is Isabel Gram I am business law attorney who has been in practice since 2004. Over the years, I’ve represented over 215 Arizona business owners and have been involved in a large number of sales ranging from $500,000 to over $60 million. I’ve been on the buyer side, and I’ve been on the seller side. Representing both sides has given me the chops to be able to spot potential issues before they occur and help save my clients time, money and headaches.
As the seller of a business, you may have only one opportunity in your lifetime to sell your business and to sell it at the best possible price. The ones who play it right can emerge from the process retirement-ready and multi-millionaires.
“Sure, but I’ve never sold a business before.”
Haven’t sold a business before? You’re not alone. The majority of business owners in the $1M-$50M annual revenue range have never sold a business before. But the key to success is having the best deal team possible. This means you need professionals on your side - attorneys, accountants and brokers - that have extensive experience representing business owners like you.
For the purpose of this article, let’s say you have a prospective buyer. Someone has approached you and they want to buy your business. Casual conversations seem to have gotten more serious and suddenly you’re finding yourself faced with an actual offer.
Step #1. Control the contract terms. Keep your advantage.
When negotiating with a prospective buyer, you want to remain in control of the sale terms as much as possible. Having your own attorney draft up the Letter of Intent (LOI) or offer to purchase is one way to control the dialogue right out of the gate. If the buyer has already presented you with an agreement of some kind, take it to an experienced attorney as soon as possible to ensure that it is modified to represent your best interests.
Once you’ve reached agreement on the basic terms in the LOI, an Asset Purchase Agreement is generally the next step. The APA allows the Seller to purchase the assets and liabilities that are identified in the agreement, versus the business entity. Again, having the drafting advantage is key.
So what’s some of the common documents that make up the Asset Purchase Agreement Package?
Letter of Intent - Initial deal sheet; offer to purchase
Asset Purchase Agreement - contains key contract provisions for the sale
Promissory Note & Personal Guaranty - part of a seller carry-back (discussed below)
Security Agreement - secures assets to a promise to pay the Seller in the future
Lists: Furniture, Fixtures and Equipment - List of inventory being purchased; Vendors and Suppliers; Key Contracts; Assets Not Included
Bill of Sale- transfers title in the assets to the Buyer
Non-Competition Agreement - when the Seller is constrained from competing against the business
Step #2. Maximize your sale price.
In general, it’s important for business owners to get as much of the purchase price upfront as possible. Often, buyers will want to pay a certain amount upfront and the rest over a period of time in the form of a note. This type of loan by the seller of a business to a buyer is called a seller carry-back note.
Seller carry-back notes aren’t all bad. Sometimes it can mean that the seller can get a much higher price for their business. However, there are major risks when accepting a note from the buyer. After all, you’re relying on the new buyer to pay a loan based on the performance of the business. What if they aren’t a good operator? You no longer have any direct control over how the business is run and no assurance that the business will continue to be profitable.
If you’re going to accept a note as part of the offer, make sure you have the following in place:
Personal Guaranty. This means the individuals behind the company will be personally liable for the debt.
Security Agreement. Secure the debt with business assets and perfect your interest with a UCC-1 filing.
Without these elements in place (and others) you could forfeit any amount promised in the seller carry-back note.
Step #3. Minimize your exposure.
Arguably, the most important part of the Asset Purchase Agreement (the sale document) is the Representations and Warranties section. Having good reps and warranties will help protect you against having to cough up money later, after the sale is completed.
As the Buyer, you will want to limit your go-forward liability (also known as successor liability) for any losses or claims that arise against the business from the date of the sale. The Seller, however, will try to achieve the opposite, trying to attach the Buyer to future damages.
There are a multitude of reps and warranties in the sale document, but the general strategy for the Seller is to limit those representations in scope, particularly in terms of materiality and time:
Materiality. A good business law attorney will look for opportunities to minimize exposure by using limiting language such as “material.” (For example, the company is not a party to any material legal action.)
Time. Buyer’s legal counsel should also limit any reps and warranties to a certain period of time so that any continued liability doesn’t continue in perpetuity.