Take a look at an entrepreneur (in any industry) that you look up to or respect. How many of them are in the exact same business model, or even the same business altogether, than they were the day they began? The answer is typically: not many.

If there’s a hallmark of entrepreneurship, it’s likely that it’s simply filled with unpredictability. There’s always an urge to do more, build more, achieve more, and grow and scale in the process. With that said, how can you best prepare your business for those seasons? Most importantly, would you be able to sell your business someday? Not necessary do you want to; but would you be able to, if the time arose?

Remain prepared. Every business, no matter the type of business can be bought and sold during its lifetime. As a business owner, recognize that you will likely be faced with such a proposition. When this occurs, there are three distinct aspects of the merger/acquisition process to be aware of: 

1. The Financials
2. The Negotiation 
3. The Legalities 

Discussions of sales aside, there are certain “best business practices” that entrepreneurs should already have in place, which are coincidently the first steps of the sale process. After all, scrambling to prepare your business sets you at a disadvantage during the negotiation and execution phases of sale.

1. FINANCIAL & BACK-END BUSINESS DECISIONS

Determining the financials of your business, and the prep work it takes to get your business prepped for sale are items that should be taken care of prior to approaching any potential buyer with an offer of sale. 

• Keep up to date financial records, books, and profit and loss statements. 
  • Of course, these are best practices for any business, at any stage in the game, simply so that you are prepared for IRS (accountant) requests. However, if a buyer crosses your path and offers a worthwhile deal, you’ll want to be prepared immediately. One of the first questions any knowledgeable buyer will examine is going to be due diligence- the primary of which will be financial information (in addition, if you have employees, contractors, etc, expect questions regarding personnel files; and depending upon your corporate formation, corporate records). Failure to have this information at the ready could cause a promising buyer to balk at your prospect.
  • Jumping ahead a bit, if a buyer approaches you or an opportunity presents itself, you will have tax considerations that must be taken into account. The manner in which you structure the transaction is going to be of the upmost importance, as it will carry many tax considerations that will require professional advice. 

The most importance aspect to keep in mind: at all stages of business, you need three key counselors on your team (or that you can turn to) at any time: a financial advisor, an accountant and an attorney. These are all fields that require professional licensure to determine key aspects such as retirement plans, investments, tax considerations, and of course, legalities. The work that require the advice of lawyers, accountants, and financial advisors require advanced notice, and the best of these types of counsel book out early, so you must be established clients early. As a note of caution: while you should never DIY license-required work, the sale of a business is an endeavor that you should never attempt to do on your own.

2. ELEMENTS TO CONSIDER IN THE NEGOTIATION PHASE

There are certain negotiation factors that will require foresight and consideration:

• First, notify your advisors. Your tax advisor may be able to advise you on methodologies and timing that could impact your taxes; your financial advisor may have accounts and strategies to adjust, and of course, your attorney, who will need to draft and review your LOI, PSA and more, and likely negotiate sale terms on your behalf.
• Consider costs. Who will carry what costs during the negotiation phase, before the deal is done?
• The business name- is the name (and any registered intellectual property rights) part of the purchase terms? If so, what is the monetary value?
• What assets will and won’t be included? Just like the question of intellectual property above, are there other assets of the business that won’t be sold, such as client lists, etc?
• What financial information will you want to share? Buyers will want to review P&L statements; Sellers must determine how many years’ worth of statements they will provide, and what elements will be included.
• How can you justify the purchase price? What evidence is provided backing your proposed price? This will be more than cash flow- what other elements will be included in the sale? For example, who would carry broker fees, etc?
• What contracts will transfer, or are outstanding? For example, is your business obligated to any preexisting contracts that will be outstanding at the time of sale? Will employee or contractor agreements transfer? Client contracts? Customer contracts?

A critical aspect of the negotiation phase that you cannot afford to overlook: cover the negotiation phase with nondisclosure agreements (NDAs) (more on this below). Arguably, the bulk of a seller’s negotiation power occurs prior the signing of the LOI- this is also the point in which the seller will be sharing quite a bit of proprietary business information that should not become public knowledge. After all, exposure of proprietary business information could vastly devalue the business itself, which harms both parties in the end.  

3. LEGAL

Once the negotiation aspect of the transaction has been conducted, typically, these legalities will typicall follow: 

• The Nondisclosure Agreement (NDA)- as discussed above, the NDA will be both parties’ best friend throughout the entire sale process. An NDA will provide both parties with protection for any proprietary information that will be shared along the way, without having to worry about that information being shared. Most will expect the seller to be the one sharing the majority of information; however, the buyer will as well, and failure to protect proprietary information could not just harm both parties, but the transaction itself.
• Letter of Intent- the LOI is typically the first step of the acquisition process, and can best be described as a non-binding offer from the buyer (or better said, prospective buyer) outlining all of the major terms negotiated of the sale. Not only will it outline the negotiated terms, but it typically will outline the structure of the transaction itself, the closing date, the purchase price, and any pertinent closing conditions (such as indemnification provisions, escrow, etc). The purpose of the LOI is to allow the parties to get all of these major terms on paper to review and discuss, before taking the more formalized step of negotiating, or entering into a legally-binding contract. This helps with clarification for both parties and their counsel, and helps create a smoother transition into the contract phase. In certain cases there may be certain legally-binding terms included, but typically this is not the case. It may also include terms precluding the seller from extending the offer of sale to other parties for a set amount of time, etc.
• Purchase and Sale Agreement– the Purchase and Sale Agreement (the “PSA”) is the actual legally-binding contract for the sale of the assets of the business. Of course, this can become a very complex document, and an attorney familiar with mergers and acquisitions should prepare this for your business. Generally speaking, this document will include terms such as:
  • Money terms- price, date, method, escrow, earn out, etc
  • Purchase terms from the LOI– in other words, who gets what
  • Limitation of liability- this will be heavily negotiated
  • Noncompete-these terms are common in PSA’s, and are upheld much more liberally in most states than they typically are in, for example, employment agreements.
  • The seller’s role in the transition process– has the seller offered, or buyer requested the seller to maintain some type of consulting role, etc? 
• Ancillary documents or steps– Depending on the size and scope of the transaction, there may be ancillary contracts, etc that must be executed throughout the process, such as employee agreements, any current contracts of the business (such as with publishers), or and reorganization steps that one or both of the business must undergo. Each transaction varies widely, and each business will have different needs throughout the sale process, which further exemplifies why this type of transaction should not be done without the assistance of competent counsel.

Discussing what to expect throughout the sale of a business is much too complex to be fully dissected in a single article; however, I hope that this article at least helps clarify what to expect throughout the process a bit. But the main takeaway from this information: never forget, absolutely any business can be sold, and a day may come where you unexpectedly find yourself in a position of wanting to sell, even if it’s something you never originally imagined.