Initial Considerations When Selling Your Business
At some point, you may want (or need) to sell your business. In order to get the most value and ensure the success of one of the most significant business decisions of your life, you need to determine your priorities, evaluate the timing of the sale, and assemble an expert team to assist you along the way. You also need to understand the ethical and legal duties that you face as you exit your business.
If your business is successful, that success is largely due to the effort, time and money that you've provided over the years. Your business is undoubtedly a major part of your life; perhaps even who you are. In some cases, your entire family may have depended on the business, discussed it endlessly around the dinner table, used it as an education and a proving ground for the children, and practically made it into another family member! Yet, the time has come to step away from your business and move to another phase in your life.
On the other hand, your business may not have been the success you wanted and you can't wait to get rid of it. Or, perhaps you entered into the business with the idea that it would be a short-term opportunity and that you'd sell out whenever you got a decent offer.
Even if you think you're many years away from selling out, you should consider what your heirs or successors would have to do if you died unexpectedly. If you don't have a workable exit strategy in place, your heirs may have no choice but to liquidate the business and sell off the assets piecemeal, getting nothing for the goodwill you've built up over the course of the years.
Whatever brings you to the point of selling your business, the sale will be one of the most significant business actions that you take in your life. Unlike the decisions you make while running the business, selling it is an action you will take only once. You get a single chance to put a price tag on years of effort — and once you sign the sales documents, it's over.
Before moving forward with the sale, it is important that you understand the steps involved. Taking the time to determine what you want from the sale, planning carefully, obtaining professional advice and negotiating a satisfactory price and acceptable terms will help make the sale a success.
Once you have made the decision to sell your business, you should consider the following issues before you actually begin the process of selling your business:
- Your priorities. What aspects of the sale are the most important to you?
- Legal/ethical considerations. Does your position as a partner, shareholder, officer, or director of the business affect your ability to sell out? How careful must you be in describing your business and disclosing problems to potential purchasers?
- Timing. What's the best time to sell your business, and how long will it take?
- Professional advisors. What kind of professional help will you need, and how will you find it?
Defining Your Priorities
Just as the decision to sell can be triggered by a number of factors, what you want to achieve from the sale can take a wide variety of forms. It is important that you go into the sale knowing exactly what you want to achieve: what are your non-negotiable items and what items are negotiable. If you do not have you end game firmly in mind, you are less likely to end up in the best possible position.
- Do you want an all-cash deal or would you be willing to finance part of the sales price?
- Is it important to you that your daughter, for example, remains with the business?
- Are you looking for a buyer who'll continue your business traditions?
- Do you want certain tax advantages in exchange for a lower purchase price?
- Is there a minimum price that you must get?
Eventually you'll be able to come up with a list of what you want from the sale, in order of priority. When you interview business brokers or mergers and acquisition specialists, give them a copy to see whether they agree with your goals. And keep a copy of your list in front of you as you go through the sometimes frustrating process of negotiating your sales contract.
As with most things in life, you'll have to make some compromises. Rarely does a sale completely meet all of the seller's objectives —or all of the buyer's. The old adage of "your price, my terms" is generally true. The more flexible you can be on terms, the closer you'll get to realizing the top-dollar value of the business.
Follow Ethical Standards When Selling Your Business
In general, it's important always to conduct yourself in an ethical
manner, and make it clear to everyone around you that you have a policy
of always doing so. If something goes wrong and you do get sued, being
able to prove that you had "clean hands" can go a long way in reducing
However, as you prepare to sell your business, the need for ethical
behavior increases. You need to have a working knowledge of what is
ethically required of you as part of the transaction. Leaving morality
aside, selling a business nearly always is a high-stakes transaction,
especially for your buyer.
Your potential legal exposure can be very
high, particularly if if the buyer paid a great deal of money and ended
up with a a business that was not what it appeared to be. If you have
partners or shareholders, you also have a risk of a lawsuit if they felt
they are not getting what they deserve out of the deal.
For that reason, you must know and obey the law in two crucial areas:
- fiduciary duties to any partners, co-owners, and shareholders, and
- disclosure obligations to potential buyers.
You Must Deal Fairly with Co-Owners
If you co-own your business with partners or other shareholders, the law imposes certain duties on you to deal fairly with them.
Duties toward partners. Partners have the most
demanding duties to each other, and under state laws are required to act
with the utmost good faith toward each other and to the partnership.
Partners are required to fully disclose to each other any material facts
that come to their attention and that relate to the partnership in any
This fiduciary relationship partners bear to each other means,
among other things, that if a partner gets any benefits from the
partnership, he or she must share them with the other partners, in
accordance with the arrangements set out in the partnership agreement.
In the context of the sale of the business, this means that no partner
can seek to benefit himself by the sale, to the detriment of the other
partners. If he does, the other partners can sue to obtain their fair
share of the benefits, whatever those might be.
Duties to shareholders. Depending on your state law,
shareholders of close corporations may be considered to have the same
duties to each other as partners do. In fact, some courts refer to close
corporations as "incorporated partnerships." Since many small or
family-owned incorporated businesses are close corporations under state
law, it's a good idea to consider carefully the effects of your actions
on any other shareholders of your company.
Many small corporations have buy-sell agreements in place that
specify what happens if one of the shareholders dies, becomes
incapacitated, or wants to get out of the company. The agreement may
state that the corporation will redeem (buy back) shares using a
specified valuation formula, or that other shareholders have a right of
first refusal to purchase the shares.
It's also common for small
corporations to set up voting trusts or agreements that will determine
who needs to agree to any important corporate decisions, such as a sale
of assets. If your company has ever set up such agreements, your lawyer
needs to look them over and determine their effect before you try to
sell your company.
Officers and directors of corporations also are considered to have a
fiduciary duty to the shareholders. They must act in good faith, in a
manner reasonably believed to be in the best interests of the
corporation. So, even if your company is not considered a close
corporation under state law, and even if no buy-sell agreements are in
place, you'll have to consider the interests of any other shareholders
when deciding whether and how to sell your company. If you don't, you
open yourself up to the possibility of litigation, and who needs that?
Know and Obey Disclosure Obligations
When you are selling your business, you must provide the buyer with
truthful and complete information about the business. This "duty to
disclose" is not an option. While it's acceptable to be optimistic and
put a positive spin on situation, you can not cross the boundary into
deception. For example, it is common to prepare a selling memorandum
that highlights all the advantages your company has over the
competition. However, as talks progress, you also need to ensure that
your buyer knows as much as you do about any potential problems in your
business. You don't have to dwell on the problems, and you should always
present possible solutions when you discuss them, but you must disclose
Material Misrepresentations Are Fraud
If you make material misrepresentations of fact about your business,
you risk a lawsuit for fraud. A misrepresentation is material if in
involves a matter that could cause the buyer to walk away from the deal
or that would result in a change in the purchase price or major
conditions of the sale.
You don't have to affirmatively lie to have made a misrepresentation.
You can misrepresent a matter simply by remaining silent when you
should speak up. The fact that the buyer didn't ask you if your
customers were likely to cancel their contracts next year doesn't mean
that you can't be sued for not mentioning it.
In fact, you can even be sued for misrepresenting information that
you didn't know! While most often the misrepresented information is a
fact that you knew but didn't disclose, in some cases information that
you were reckless or grossly negligent in not finding out. Possible
exposure to a lawsuit for fraud is one reason you should have your
lawyer review any written material you pass on to buyers, to be sure
that it is accurate and covers all the ground that it should.
In a fraud action, the buyer must prove that he or she reasonably
relied on your misrepresentation. Reasonable reliance means the buyer
has an obligation to use common sense in accepting your statements as
true. This is one reason the buyer conducts a due diligence
investigation of your business before the purchase agreement is signed,
although the phrase "due diligence" is actually borrowed from
Fraudulent Conveyance Creates Liability
You are also exposed to legal liability is the sale of the business
is considered to be a fraudulent conveyance. If you or the buyer (or
both of you) should have known that the transferred company would fail,
you may be forced to pay back the purchase price. For example, if your
predictions about the company's future growth are far too optimistic,
and lead the buyer to take on more debt than the company can support,
the company may go bankrupt. The bankruptcy judge can require you to pay
back the purchase price and essentially "undo" the sale. The object is
to give any unsecured creditors of the business a fair shake at getting
paid when the company is liquidated.
Your potential liability for
fraudulent conveyance lasts for up to six years after the sale, so it's
important that you check out the buyer and his or her resources, to be
sure that the company has a good chance of survival after you sell it.
Failure to Disclose Can Be Securities Fraud
The concept of fraud potentially applies to all business
transactions. However, if your business is a corporation and you sell
the stock in your corporation, or accept stock in the buyer's
corporation as payment, you may be subject to more specific disclosure
obligations under federal and state securities laws. If you're
contemplating a transaction that involves a sale or exchange of stock,
you'll need to get expert legal assistance on a variety of issues,
including what you can, can't, and must say about your business.
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