News & Thought Leadership from Sulloway & Hollis

February 28, 2018

Selling Your Business

Define Your Priorities

Before beginning the process of selling a business, the owners (shareholders, members) need to talk about why they are selling and ensure that everyone agrees with the decision. The reason for selling may be a factor in determining the sale structure. Some owners may be close to retirement age and would like to take the money and move on, while others may wish to work for the acquiring owners. In addition, the method and timing of the payment for the proposed sale needs to be structured to be acceptable to everyone. An earnout, or any type of deferred payment of a portion of the purchase price, especially if the payment is dependent upon the future performance of the company and its managers, may be acceptable to owners who remain as employees, but is usually not acceptable to an owner who wishes to retire and will no longer be employed.

Letter of Intent

It is important to have a good working relationship with both your attorney and accountant. Do not assume that the Letter Agreement is non-binding and just sign it without the benefit of counsel. While it is true that some of the provisions may not be binding on the parties, many buyers are now introducing terms into the Letter of Intent that, once agreed to, will become part of the purchase agreement. Some examples would be indemnification terms, earnout formulas (these may be used if the purchase price is paid out over a period of time) and hold back provisions. Some Letter Agreements may also include break-up fees, which are required payments for failure to close the transaction. If the Letter Agreement is signed and then counsel is retained, it may be too late to negotiate more favorable terms. Your accountant can help structure the transaction from a tax point of view. One of their primary goals will be to make sure the tax impact is mitigated as much as possible.

Due Diligence

Once the Letter Agreement is signed, the due diligence process is started. The buyer will send a written request for your company’s financial information, leases, purchase and customer agreements and corporate records as well as other information. Before anything is sent, your attorney should (i) make sure your corporate and other records are formalized and that all transactions are clearly documented; (ii) examine your material contracts (including real estate leases), (iii) determine whether material contracts and leases may be assumed by a buyer; and (iv) ensure that your intellectual property is protected and that you have proper agreements in place with your employees and contractors.

If each of the above steps have been carefully followed and all the major issues such as purchase structure (asset or stock purchase), method and timing of payment of the purchase price, indemnification limits and deductibles and the continued employment of the owners are addressed in the preliminary stages, the negotiation of the purchase agreement is less stressful, and the chances of successful conclusion are increased greatly.

Purchase Agreement, Closing

This is why the Letter of Intent is important. The Purchase Agreement must reflect the terms agreed to in the Letter of Intent. A significant amount of time and expense has been incurred in getting this far in the process and it can create bad feelings if the transaction fails to close because of terms that should have been fully addressed in the beginning of the process.

While the agreement will contain many provisions that may seem like legalize, it is important to carefully review the entire agreement, especially any terms that impact deferred payments and holdbacks. Always make sure that any debt is clearly defined and paid as well as any items that will impact the company post-closing, such as accounts payable and receivable.

It is important to have a lawyer well versed in the practice or buying and selling companies as well as retaining the services of an experience CPA.