Every small business needs to work with both an accountant and an attorney. While the necessity of an accountant is obvious, the reasons for hiring a small business attorney may not always be so clear. A lot of small businesses operate on virtually a shoestring budget for the first several years, and sometimes, the entrepreneurs who launch those small startups simply presume that an attorney’s services will be too costly. What they may not have calculated accurately is the cost of not having an attorney’s services.
When should a business owner consult a lawyer about the decision to sell?
The worst time to sell a business is when the owner has no choice but to sell. But this determination has to do with the health of the business, the financial state of the business, the tax ramifications of selling and the outlook for the business. These considerations are not generally what a lawyer would have insight into.
Once a decision has been made to consider selling, a lawyer should be part of a team to assist with the preparation of a package of information necessary for offering the business. The team should include people who have expertise in valuation of assets, sales and marketing of businesses, tax analysis, existing contract rights and obligations (loans, real estate and equipment leases, rights of refusal, shareholders agreements, employment agreements, supply contracts, production contracts, distribution agreements, franchises, intellectual property rights, etc.), employee benefit plans, environmental risk assessment, etc.
What should a business owner look for in legal counsel when selling a business?
Lawyers who are experienced with assisting buyers and sellers of businesses will have developed checklists and contracts to cover the issues common to these transactions. A capable lawyer should know other professionals who can be on the team and indicate a willingness to work with others. A lawyer who handles business transactions will probably not advertise as a criminal defense or personal injury lawyer and may not advertise at all. Bankers, accountants, commercial real estate brokers and appraisers, and business brokers are good sources of referrals to business lawyers. A lawyer who has provided good business advice for the business being sold is an obvious choice.
Lawyers should be able to advise the seller on the pros and cons of stock sales versus asset sales, and the nature of the seller’s representations and warranties that will be expected by buyers.
Many sellers are afraid they will get left holding the bag if the buyer is unable to run the business. How can sellers protect themselves?
There’s a trade-off between the price of the business relating to goodwill and other intangibles and the amount that the seller will have to finance, exposing the seller to more risk of having to take over the business upon the buyer’s default. If the seller remains the guarantor for debt assumed by the buyer, the potential that the seller will have to step back in is great.
The only sure way that the seller can avoid the risk of having to take over the business is to refuse to finance any part of the sale or to guarantee any debt. However, these refusals will eliminate many good buyers and will depress the sale price.
What advice do I have for handling the entire process of selling a business, from due diligence through closing?
Preparation is the key factor. Using the team approach described above will help prevent surprises in the due-diligence phase. Before the business is offered for sale, the seller should have a prototype stock purchase agreement or an asset purchase agreement, with all exhibits in place, which can be finalized without a great deal of investigation. The negotiation process can be focused on the price and financing rather than the buyer’s effort to extract critical information from the seller, which damages the level of trust between buyer and seller.
Factors that will help are having good financial statements, inventories, asset lists, surveys of real estate, operation and maintenance manuals and records for equipment, well-organized files, and employees who are prepared for the transition.
What are the common mistakes that some sellers make?
Sellers often confuse what they’ve invested in a business with what it is worth on the market. Sellers often have deferred maintenance on real estate and equipment, and have been careless with accounting between personal and business income and expenses, or among businesses.
Small business control and management structures are sometimes built on family relationships that have become complicated over time, often to a point of becoming severely dysfunctional. If the decision to sell is a result of a key family member having died or become ill, or if the prospect of selling the business means some family member is going to lose a good job or a good income, the decision to sell was made too late. The process of selling can end up in litigation, and the buyers will not come around for a long time.
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