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What Documents Do You Need When You Sell a Business?

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Is it time to retire? Or, are you looking for something new and exciting to try? If you’re ready to sell your business, what documents do you need when you sell a business? There are important steps that need to be taken. One of the first things you should do is start working with a professional business broker. A lot of information about your business will need to be compiled, and the business will need to be marketed properly to find the right buyer, or for that matter, any buyer. Your broker will be with you through every step of this, ensuring you have the best chance of selling the business and getting a good price and terms for it. Some of the documents they can help you gather or create include the following:

Confidentiality Agreement

The first thing that’s done is to create a confidentiality agreement (CA), otherwise known as a non-disclosure agreement (NDA).  The Seller will want to have a confidentiality agreement signed by the Buyer. This is designed to help keep sensitive information about the business from being released, so it’s something that benefits you, as a Seller. If the Buyer goes through due diligence, learns sensitive details about the business, then decides against purchasing it, the Seller won’t want the Buyer taking advantage of the information they’ve learned. The confidentiality agreement should be signed before any information about the business is released, including the name.  This way, the Seller is protected regarding sensitive information being released about the business, or just the fact that the business is being sold, at all.

Letter of Intent

Once a buyer has done some initial due diligence and wants to make an offer, they create a Letter of Intent (LOI).  The LOI details the conditions and terms of the sale, which include the purchase price, if a deposit is needed, terms for due diligence, and more. It is possible for the Buyer to create an LOI and submit it to the Seller, but this won’t always be the case. The business broker, attorneys, Seller, and Buyer can work together to create an LOI with terms they both agree to and are willing to sign. The LOI is a non-binding agreement, which means there isn’t yet a guarantee that the sale will happen. However, once there is an LOI signed by the buyer and the seller, the Seller will usually give the Buyer some exclusivity, and the Buyer may place a deposit in good faith. Smaller deals usually have deposits while larger deals do not, though they may have “break-up” fees.  If problems are found in due diligence or the negotiations don’t go through, the Buyer receives this deposit back, depending on timing and successful completion of due diligence. The LOI can also be used by the buyer to help secure a loan with a bank to purchase the business.

Documents for Due Diligence

The Buyer will need to do due diligence to make sure the information presented about the business is true and complete. The Seller will need to get various materials ready for diligence, but it’s something that is incumbent on the Buyer to complete. Diligence is where the Buyer examines information about the business to understand how that particular the business is run and to make sure it’s a viable going-concern.  During due diligence, the buyer will look through financial records, sales reports, profit and loss statements for the previous few years, leases, contracts, loans, records of orders, and more. It is important for the Seller to have these documents ready and available for the Buyer to view and to make sure they’re properly organized so the Buyer will get the information they need.

Purchase Agreement

If the Buyer does decide to purchase the business, the next step is the purchase agreement and the other documents that make up the “definitive agreements”. The purchase agreement is a binding agreement, and once it is signed, the buyer is obligated to proceed with the purchase, unless there are material changes to the business before closing or a major business disruption/act of God. The purchase agreement will include any details of the sale, such as the purchase price and any specific terms. Both the Buyer and Seller should agree with all information in the purchase agreement.  The attorneys for both sides will include anything needed to help protect their clients’ interests. This document can be very large, and sometimes this can be where things can become contentious.  While most business brokers are not attorneys and will not write legal language, brokers can help mediate “business decisions”.  This happens when attorneys reach a stalemate in negotiations and need both sides to make a “business” decision.

Seller Financing (Not All Sales)

The financing can differ based on the buyer’s financial situation, the risk involved in transferring the business to a new Buyer, or what the bank may be willing to lend on an acquisition. For sellers, the best option is to receive cash from the Buyer. However, many buyers cannot pay all cash, nor are they interested in taking all of the risk. Instead, they’ll need to finance the purchase. This can be done through a bank loan, but it can also be done via seller financing, or both.  If the Seller does agree to finance the business purchase, documents need to be created outlining the terms of the agreement. This is called a promissory note, or a Seller’s Note.  Seller Notes are never a pleasant option for Sellers, who then need to help finance their own business sale, but seller financing documents can help protect the seller if the buyer cannot or does not pay. If the business is purchased with cash or a bank loan, seller financing documents are not needed. However, because all small businesses are risky, some amount of seller financing could be the difference between receiving a premium for the business, or selling the business, at all.

Closing Documents

When everything else is done, the last step involves the closing documents. These usually include the bank paperwork needed to close the sale and transfers the ownership of all parts of the business to the buyer. There are a number of legal contracts included in this paperwork, so it is a good idea to have a professional help with this step. However, this is the last step so, as long as there are no outstanding issues from the previous steps.  Then, these papers can be signed, the money is wired to the Seller, and the deal is officially considered closed. Note that the closing documents can differ based on the details of the sale, such as the financing and any specific terms that may need to be included in the final paperwork.

Getting ready to sell your business takes a lot of work, and you’ll need a lot of documents to get ready to sell. Whether you’re just thinking about it now or you’re ready to talk to someone and get started, a business broker, along with a dedicated M&A attorney can help. They’ll be with you through each step of the sale and will work with you to compile all of the info needed to sell your business. Talk to a business broker today about what documents you need to sell your Austin TX business and learn more about how they’ll help you complete your next sale. What documents do you need when you sell a business? These can be the difference between selling your business or not selling at all!

Exit Strategies for Small Business Owners

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A business owner who is ready to leave their business needs to have an exit strategy. The exit strategy is simply how they’ll remove themselves as the owner of the business, how they’ll monetize their business, and how long the exit strategy will take. By working out the exit strategy in advance, small business owners have more control over their futures and the future of the business. Some of the most common exit strategies used by small business owners today include the following:

Liquidation or Walking Away

One strategy small business owners can use is to close the business and liquidate all of the assets to cover any remaining debts. This can be advantageous because it’s possible to close the business and sell off any remaining assets quickly, but it can have disadvantages as well. There is not going to be a high return on assets for the owner, and the only money they’ll receive is the money from the liquidation sale. Even when the economy is doing well, it may be difficult to get good prices for machinery or equipment the business is selling. Plus, when money is obtained, it must go to repaying debts, while anything remaining goes to the business owner.

Keep it in the Family

Some business owners may want to give or sell the business to a family owner. This could lead to a potentially smooth transaction, especially if the family member has already been a part of the business and knows what is needed to manage the business successfully. It also can allow the small business owner to continue to work in an advisory position. The downside to this is that the family members may not want to take over the business or may not have the appropriate skills to do so.

Selling to an Employee

It is possible to sell the company to current employees or managers who may be interested. The employees or managers are already familiar with the business, so they’re likely to want the business to succeed. If this is done over a long period of time, it can increase employee loyalty, as well. Unfortunately, there may not be an employee or manager who is qualified to own the business, and there may be an issue with financing the sale. Along with this, there’s the potential for clients to be dissatisfied with the new ownership or any changes in how the business is run.

Selling on the Open Market

The most popular way to sell a business is on the open market. This is also often the easiest way to sell a business, as a business broker can handle a lot of the work. If a business owner is ready to retire or wants to try something new, they can engage a business broker and look for the right buyer. This can help maximize the return for the business owner.  However, there is a lot that can influence the price of the sale. With the right business broker to help, a business valuation can be done to determine the best selling price and to potentially sell the business faster. Business owners who want to sell on the open market would be advised to work with a business broker, so they can get the best terms and profit as much as possible during the sale of the business.

Bankruptcy

While no one wants to file for bankruptcy, it does provide the opportunity to get out of a bad situation. If bankruptcy is necessary to sell the business, working with a bankruptcy attorney can allow the business owner to file and start liquidating the business. Once the bankruptcy is complete, the business owner can potentially have business debts settled.  Psychologically, it may be satisfying to not have the same responsibilities, anymore. However, it can impact their ability to obtain credit in the future and can end the relationship with suppliers, clients, and customers. If the business owner wants to open a new business in the future, the end of important relationships can be an issue.

Going Public With an IPO

Depending on the size of the business, it may be possible to go public through an IPO. This can be extremely profitable, but it is not fast. Most businesses typically take many years to build enough scale to sell to the public through an IPO.  Also, depending on the structure of the IPO, the business owner may have to wait to be able to sell their shares during what is called the “lockup” period. It’s also important to be aware, before deciding on this exit strategy, that there are higher compliance and reporting standards for a company that is public. Plus, Dodd-Frank laws state that an owner could be held personally liable for fraudulent accounting of the business, even if they were not directly involved, or any failure to disclose certain issues with the business when it goes public.

Merger or Acquisition

Mergers and acquisitions are other options for small business owners to consider. For a merger, the business owner will likely need to continue being a part of the business, for at least a transition period, so they will not be able to walk away right after the merger is done. With an acquisition, however, the business is purchased by another business. In this case, the owner will sell the business to the other company, and the other company will combine it with their own. While there will likely still be a transition period, the expectation may be that the former Owner may be able to leave, after a short transition period.  One of the downsides to acquisition is that the small business owner may need to sign a non-compete agreement, meaning they can’t open a new business in the same industry for multiple years.

When it’s time to leave a business, whether to retire or start something new, finding the right exit strategy is a must. While some of these are not desirable, like filing for bankruptcy, there are options to account for just about any situation. To get a larger profit or to make sure the business sells quickly, working with a business broker to sell the business on the open market may be the best solution. Talk to a business broker today to find out how much your business could be worth or to find out what is needed to sell your business or what exit strategies are best.

Is Selling the Business to an Employee a Good Idea?

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When it’s time to sell the business and retire or move onto something new, one option business owners may have is to sell the business to an employee. If there is an employee capable of owning the business and ready to do so, selling it to them could be a good decision and could be beneficial to the seller. However, it is important to note that there could be risks to doing this, so sellers will need to think carefully about what they want from the sale and whether selling to an employee will allow them to get what they need from the sale.

Company Retains the Culture and Values

The employee already knows everything about the business, and they likely already care about what happens to the company. They’re more likely to maintain the current culture within the company as well as stick to the company’s values. It’s also more likely they’ll retain the current employees, as they already have a connection with them and know how the employees work.  However, the Seller may want to think about whether selling to a single employee may ruffle the feathers of other employees?

More Control Over the Sale

When the buyer is an employee, the Seller often has more negotiating power and more control over the sale. They’ll be able to dictate more of the price and terms, and the buyer may be more willing to compromise since they’re already involved in the business.  However, when you only have one buyer, this can also lessen the bargaining power of the Seller, as well.

Less Hassle During the Sale

There is a lot that goes into preparing a business for sale, but some of this isn’t needed if the buyer is an employee. The employee is already familiar with the business, so there’s usually no need to produce marketing materials or try to convince them the business is worth purchasing. They already know it is. It’s still important to be transparent during the sales process, but a lot of this is easier with an employee instead of a buyer that’s not connected with the business.  Most sellers want to simply “hand over the keys” and this can be easier with an internal buyer, rather than an external buyer.

Smoother Transition to New Ownership

Since the employee already works for the company, the transfer of ownership is often a lot easier. The employees, customers, suppliers, and distributers most likely know the new owner, and there isn’t as much of a learning curve for handling the day-to-day operations of the business. This means the seller may not need to stay for consulting after the sale is completed.

There Can be Drawbacks

Of course, there are potential drawbacks or risks when selling to an employee. Some of these include the following.

  • Lower Sale Price – Most sales to employees generate a lower sale price compared to sales to other buyers.  While this may seem counterintuitive, most internal buyers would think it would be less expensive to start a new business, than pay a market price for the Seller’s business.
  • Lack of Capital – Most employees will not have the capital to purchase the business all at once or not have enough funds or credit for a bank loan. This could mean the seller must finance the sale, which can have drawbacks of its own.
  • Employees May Quit – If the owner lets employees know they’re thinking about selling, the employees may wonder if they will still have a job. This may lead them to start looking for a new job and quit instead of waiting to see what happens.  This could also happen if there are any internal jealousies that result from a certain employee buying the business versus another.

How to Sell to an Employee

The most common way to sell a business to employees is through an ESOP or Employee Stock Ownership Plan. The employees in the ESOP are able to purchase stock in the business, sharing the ownership. Each employee receives an ownership stake, and the stocks are held in a trust until they leave the company. There are various ways to fund the ESOPs, including bank and seller financing. This can provide tax advantages like a deferral of capital gains taxes, which can be beneficial for the seller. Depending on how this is structure, the owner is still able to protect the company and can take control of the company again if needed to boost sales or profits.  An ESOP can be appropriate for businesses that make $1.5 million in cash flow or higher, as this can be an expensive option.  It’s also more appropriate for businesses with a strong, internal management team.  If you’re an Owner who wears many “hats”, this may not be the correct option for you.  If you are also concerned about getting all of the money up front and not having to worry about the business going forward, this may not be a great option for you.

Determining if Selling to an Employee is the Right Move

Selling the business to an employee or multiple employees may make a lot of sense if there is an employee ready and willing to take over the business. However, it’s not always the right move to make. Business owners will need to consider whether they need the sales proceeds upfront, whether they want to maintain the business as it is and help it continue to thrive in the future, or if they’re worried about what will happen if a new owner takes over the business. If the owner does decide to sell to an employee, they should start preparing for the transfer of ownership as soon as possible.

How to Prepare to Transfer Ownership

Before the business can be sold to an employee, there are some steps the owner should take. These steps help ensure the employee is ready to take over the business and that they’re going to be able to handle the ownership once they are in charge. The steps to take include the following.

  • Training for Ownership – The training part of the transfer can be the most important. The employee learns more about how the business is run and is able to take more control over the business, but they do still report to the owner and will need to have some decisions overseen by the current owner of the company.  However, the longer the lead time, the better, especially if there are contingent payments, such as seller-financing involved.
  • Higher Management Level – The employee can be moved up to a higher level in the company. The owner still has the control, but the employee has a little more free reign to make decisions for the business and learn more about how to run the business.
  • Vesting Phase – During this, the ownership and voting rights start to transfer to the employee, and the Seller receives payments based on the agreement with the employee. The employee is now more in control over the business, and the Seller does less of the day-to-day operations.
  • Final Control Transfer – At this point, the transfer of ownership is complete. The way this looks depends on how the sale is done, so it is possible for the seller to still have some say in the company and still receive profits to cover the purchase of the business. At this point, however, the employee is the owner of the company.

Selling a business to an employee can be a good idea, but it won’t work in all situations. If you’re considering selling your business and you’d like to sell to an employee, talk to your business broker or M&A professional, and legal professionals about what to expect and how it works. Visit businessbrokersaustin.com now to get help or more information on selling the business to an employee.

Tips to Make Selling a Business Much Easier to Handle

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Business owners who are ready to move onto something different or just ready to retire and enjoy the money they’ve earned will want to make sure they can sell their business as easily as possible. However, selling a business does take some time and proper planning to ensure everything is done properly and that there are no issues with the sale.

Start Planning for the Sale as Early as Possible

When a business owner decides to retire or to start a new business, the first thought they often have is, will it be possible to sell my business? While most businesses that have positive cash flow will allow the owner to sell their business, this isn’t going to happen overnight. In fact, it could take up to two years from the thought of selling to the actual sale. If they’ve decided to sell the business, they will want to make sure they start planning right away, and this could mean finding the right help.

Get Help to Sell the Business

Many business owners who are interested in selling a business will want to make sure they have help from the very beginning. A mergers and acquisitions advisor is going to be able to help them whether they’re merging their business with an existing one as part of the sale or if they’re just selling it to an interested business owner. They can receive help determining the value of the business, organizing paperwork for the business, finding a buyer for the business, and more.

Determine the Selling Price of the Business and Any Conditions

When the business owner is ready to sell, the first step in how to sell a business is for them to determine how much they want to get for the business. They’ll need to determine the value of the business and how much they would like to get when they sell it. They might want to think about any conditions they might have for who can purchase it or what can be done with the business after the sale (i.e. are there any synergies?). This will help them make sure they’re ready to start looking for the right buyer. This is something the business broker or the mergers and acquisitions advisor can help them with to ensure the business is ready to be sold before a buyer is found.

Start Looking for a Buyer for the Business

The next thing they’ll do is look for a buyer for the business. This can be the most difficult part of trying to sell a business because they’ll want to make sure they find a buyer who is serious about taking over the business and who is going to be willing to pay the offered price or negotiate to a reasonable price for the business. If they have a mergers and acquisitions advisor helping them, the business owner can get the help they need to find the right buyer and complete the sale quickly.

For many business owners, the idea of selling a business can be daunting because it’s a long process and there’s a lot they need to do to ensure they’re prepared. If you’re ready to sell your business, make sure you talk to a mergers and acquisitions advisor today so you can start getting the help you need. They’ll help with every step to ensure your business is sold as quickly as possible and help you get the right terms and as much money as possible for it.

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CGK Business Sales

401 Congress Ave

Austin, TX 78701

phone: (512) 900-3770

website: https://businessbrokersaustin.com