Successfully Selling Your Business Requires an Expert Team
In order to get the highest value for your business and to negotiate the selling process effectively and efficiently, it is imperative that you enlist the aid of qualified professionals.
Even if you've been a determined do-it-yourselfer from day one, selling your business is not a job you should attempt to do alone. Even for a relatively small business, there's a myriad of federal, state, and local regulations and tax issues to consider, not to mention one or more extremely important contracts to negotiate. Selling your business is something you'll probably do only once: There's no opportunity to take a trial run or build up any experience before you do the real thing.
In addition, the process of selling of business can take a lot of time and effort. The more involved you get with it, the less time you'll have to spend actually running the business, at the very time when you need your business to run most successfully. You'll be much better off leaving some of the work to experts who've crafted dozens of deals, instead of spending a great deal of your time trying to reinvent the wheel.
There are a number of team positions that you must fill, although it's possible that the same individual or firm may fill more than one of these:
- tax expert;
- business broker;
- business appraiser/valuation expert; and
- banker or other financier, if third-party funding is needed.
Not all of these positions need to be filled for every small-business sale—much depends on the size and nature of your company.
However, at a minimum, you'll need to involve your lawyer and accountant, who may also serve as your tax adviser. Even a small sole proprietorship will need a lawyer to look over the sales contract— if this document is not worded correctly you may not only fail to get all your money, but you can also be exposed to potentially huge liability claims by the purchaser, creditors, customers, employees, etc. The sale will have tax consequences that must be sorted out, and state laws typically require certain papers to be filed whenever a business sells all or most of its assets. If a partnership, an LLC, or a corporation is involved, the complexity of the deal will quickly mushroom.
Your Accountant Is an Indispensable Team Member
If you're thinking of selling your business, it's likely that your accountant will be one of the first people you turn to for advice. If you've used an accountant regularly to prepare your tax returns and draw up financial statements, he or she will be very well acquainted with the financial shape of your business. Most probably, your accountant also has other clients in similar businesses and can tell you how you compare to them. So, your accountant will be in a good position to know whether your business would be attractive to a potential buyer, and can give you some good ideas on how to make it more attractive.
Your accountant will also be essential in drawing up the historical and projected financial statements and other data required to place a proper value on your business, and in gathering and organizing financial data requested by the buyer during the due diligence phase of negotiations.
If you haven't been in the habit of getting audited financial statements, we strongly suggest that you do so now. If the accountant you've been working with is not a CPA, he or she may be able to recommend someone who can perform this service for you. Another possibility is to use a business appraiser or valuation expert who is also a CPA and can provide the audited statements as part of placing a value on the business.
As two of the key people in the team you're assembling to complete the sale of your business, it's very important that your accountant and your lawyer work well together. If they don't communicate frequently, they may end up duplicating some of each others work, which means you may have to pay twice. In fact, you may want to use an attorney that your accountant recommends, or vice versa, specifically because you'll know that they respect each other and can cooperate.
Tax Expertise Can Save You Money
It is absolutely essential that at least one of your team members be an expert in dealing with the tax aspects of business sales and acquisitions. This person may be your accountant, your lawyer, or even your mergers and acquisitions consultant. You may also decide to hire a specialist solely for this purpose, most likely a lawyer associated with or recommended by the lawyer who is handling your sale.
Depending on how your deal is structured, you may face an enormous tax bill upon the sale of your business, or next to none. There are a lot of opportunities to save money here; unfortunately, the IRS has set up an almost infinite number of hoops you must jump through in order to take advantage of them. What's more, the tax laws, regulations, and IRS interpretations are constantly changing, so those hoops are moving targets.
Taking advantage of tax-saving opportunities requires planning well in advance of signing the sales documents, so be sure to read our discussion of tax aspects of the sale and consult with your own tax expert before you begin serious negotiations with any buyer.
Make Sure Your Attorney Is Well Qualified
Your lawyer needs to play a key role in your plans to sell your
business, and in drawing up the legal documents used to carry out those
Many small business owners have established a relationship with a
business lawyer over the years, and as a matter of course decide to have
this lawyer handle the sale. If your business is a small one or your
attorney is very experienced in all aspects of transition plans, this
may very well be a wise course of action. However, before automatically
going with your tried-and-true business attorney, make sure that he or she is familiar with all the legal aspects of selling a business. Business
sales--whether an outright sale or a merger or acquisition--require a
high level of expertise in the area and time to devote to process.
For this reason, you may decide to use an attorney who specializes in
business transfers or mergers and acquisitions. Most larger law firms
have M & A specialists on staff, although these experts don't come
cheap. However, when you're talking about a once-in-a-lifetime deal,
it's well worth it to get the best legal advice that you can afford. If
your deal will be too small to interest a high-profile attorney, he or
she might be able to recommend an associate who would be interested.
If you are working with a business broker or M & A agent, he or
she may be able to recommend an attorney who's successfully guided other
businesses through a sale. However, in most cases, it's best to hire
the lawyer first so he or she can examine the broker's listing agreement
before you sign it.
As with any professional, the best way to find a good lawyer is
through word of mouth: ask your current lawyer, accountant, other
business owners, or retired owners if they liked the attorney they used.
Once you've collected a few names, interview them to see whether they can take on your sale.
Make sure they have the time, the staff and the expertise to do an
exceptional job on your behalf. Ask them point blank how much experience
they have had in business succession planning and implementation. Ask
how many other clients they have had that are in the same line of
business as you are. Finally, ask them what the fee schedule is and
exactly what is covered and what are "additional charges." Once you have
all these questioned answered, ask yourself the most important
question: Do you feel comfortable with their knowledge, experience,
communication style, and level of integrity.
Retainer agreements. Ordinarily, your lawyer will
expect you to sign a retainer agreement and to pay some substantial
portion of the fees up front. It's to your advantage to sign such an
agreement (after reviewing it carefully, of course): it will lay out the
scope of the services the attorney will provide, and put the fee
arrangement in writing.
The two key parts of the retainer agreement are
- the statement of exactly what services the attorney's will provide and
- the fee arrangement.
The contract should state the attorney's hourly rates (many charge a
higher rate for court time or other specified services), or the flat fee
if you're paying on that basis. If a flat fee is involved, it's very
important that the agreement specify what services are included for that
The contract should also specify whether you'll have to reimburse
the attorney's costs in addition to the flat or hourly fee. It may state
the billing schedule (for example, that you pay an up-front retainer of
several thousand dollars against which hourly fees are charged; when
the retainer is used up, you start paying monthly bills), and whether
and how much interest will be charged on unpaid balances.
Make sure the attorney is your representative. The
agreement should also define exactly whose interests the attorney is
looking out for. Theoretically, all parties to the transaction (i.e.,
each individual partner or shareholder of the business being sold and
each individual purchaser, plus the business entity itself if
incorporated) should have a separate attorney. Obviously, this can get
very expensive and impractical if there are a number of shareholders, so
many attorneys will agree to represent more than one party if proper
waivers are signed.
For example, the attorney may agree to represent you individually as
majority shareholder and to represent your corporation as well, provided
you sign a disclosure document. The document will state that you
recognize the potential differences between your interests and those of
your company, but you agree to the dual representation anyway.
However, we don't advise that you go so far as to have only one
attorney representing both the buyer and the seller — that situation
presents a real conflict of interest, rather than just a
potential difference. Few attorneys would agree to such representation
anyway. Any time there is a real conflict of interest, the parties in
conflict should retain separate counsel (for example, if some
shareholders want to sell but others do not).
Using a Business Broker Can Improve Sale Prospects
You don't need to list your business with a business broker or agent
in order to sell it. You may already have a good idea as to who the
likely purchaser of your company would be — perhaps a key employee or a
relative — in which case the marketing power of a broker won't be
necessary. You may have gotten unsolicited offers to purchase your
business. Or, you might decide to place ads yourself in the business
opportunities sections of several newspapers or trade publications, to
see if you can find a buyer without having to pay a broker's commission.
However, if you don't already have a buyer lined up, it's likely that
you can benefit greatly from increased exposure to a large pool of
potential buyers. A business broker can provide this for you. A broker
can contact likely purchasers (including competitors, suppliers, major
customers, and investors known to the broker) directly and tell them the
key facts about your business, without "naming names" until the contact
has shown definite interest.
The broker can also screen interested parties for financial ability
and other criteria that you specify, so you won't waste time talking to
unqualified buyers. Perhaps even more important, a broker can guide you
through the process of selling based on experience gained from many
Match Type of Broker to Size of Business
The type of broker you select will largely depend upon the size of
your business. Because brokers are compensated based on a percentage of
the sales price, if your business is very small businesses, you may find
it hard to locate one willing to take on the listing. Instead, you'll
have to try to locate a prospective buyer on your own, or sell off your
assets as best you can. You may also find a real estate agent who does
business brokerage as a sideline and may be are willing to take on a
As a general rule, business brokers are interested in listing
companies valued at more than several hundred thousand dollars, although
the cutoff point varies throughout the country. If your business is
worth more than one million dollars, you may want to hire a mergers and acquisitions intermediary
— a more sophisticated type of agent who functions as a consultant for
both buyers and sellers and whose organization may even have in-house
valuation specialists and financing available.
Interview the prospective broker about recent sales he or she has
handled, and ask for the names of satisfied clients you can contact.
Make sure you follow up on these references.
Carefully Review Fees and Listing Agreements
The main drawback to using a broker or other agent is the fee, which
may be as high as 10-12 percent of the sales price for smaller
businesses. Businesses over $1 million may be charged using a formula,
such as "5 percent of the sales price up to $1 million; 4 percent of the
sales price between $1 million and $2 million; and 3 percent of any
sales price above $2 million." A mergers and acquisitions professional
may also charge you for costs and expenses, and you may have to agree to
pay a minimum fee whatever the sales price.
You'll be expected to sign a listing agreement, which will lay out
the fee schedule. Usually, brokers' fees are contingent, meaning that
they are paid only if and when the business is sold. In some cases, the
fee will be split between your agent and an agent hired by the buyer, or
you may be able to convince the buyer to pay some or all of your
broker's fees during price negotiations.
Try to have the listing agreement provide that the fee will be paid
at the time you receive the purchase price, not at the time the deal is
closed. That way, if you wind up financing a good portion of the price
over a number of years, you'll pay the agent only as you actually get
The listing agreement is for a specified period of time — if a buyer
is located within that period, the agent will be entitled to the fee.
Anything under three months won't give the agent enough time to
effectively market your business. Conversely, if the time period is too
long, you won't be able to switch agents if you find that yours is not
working effectively. Since you can always agree to extend the listing
period, we suggest you initially list for no longer than six months so
you can be sure your agent will get moving quickly.
You may also be able to negotiate a clause stating that if you
find a buyer on your own (for example, one of your key employees
decides to purchase) you don't have to pay the broker's fee. Without
this clause, the broker usually must be paid if a buyer materializes
during the listing period, regardless of who actually finds the buyer.
As with any legally binding document, we advise you to run the listing agreement past your attorney before you sign it.
Retain an Appraiser to Value Your Business
Your need for an appraisal, and the kind of appraisal that will be
done, really depends on the size and complexity of your business. If you
are a small service company with few assets, or have only common assets
like cars, real estate, and office equipment, you may not need to hire
an appraisal specialist — your regular accountant's assessment of your
book value may be adequate. You may also choose to rely on your business
However, in many cases, it's worth the time and money to hire an experienced business appraiser. The value of your business
depends on a very large number of interrelated factors. If you're to
receive the full value of the business, but avoid setting the price so
high that it drives away all potential buyers, you really need the
analysis of an expert. Moreover, when buyers question your price during
the negotiation process, it helps to be able to point to the precise
reasons why your business is so valuable.
An appraisal from a business valuation expert can also be essential
to prove the value of your company to the IRS, particularly if you are
selling or giving it to relatives or other "insiders." If you embark on a
gifting program that involves giving some stock to your children each
year, you may need to get an annual appraisal for IRS purposes.
Consider the Lender Your Teammate
In most cases where third-party financing
will be needed to complete the sale of a business, it will be the buyer
who selects the lender and negotiates for financing. We mention the
banker as a member of "your" team only to emphasize that it's to your
advantage to cooperate with lenders as much as possible. Thinking of the
lender as a team member may help you to share the necessary information
and work with the lender to get the deal closed.
Require Confidentiality Agreements from All Parties
It almost goes without saying that all these professional will learn
all sorts of confidential information about you and your business —
information that could be damaging if it gets into the wrong hands. For
this reason, you should make sure that the information will be treated
with utmost confidentially. Particularly in the case of the broker, you
should require a confidentiality agreement stating that all information
about your business is deemed valuable and confidential, and that the
broker can only disclose it to qualified buyers for the purpose of
evaluating the acquisition decision. This agreement should be included
in your listing agreement, and should be examined by your attorney
before you sign.
One of the key reasons for using a business broker is that he or she
can contact potential buyers and whet their appetite by telling them the
general facts about your business without revealing your name. Before
you sign the listing agreement, you'll want to ask the broker what
information would normally be revealed, at each stage of contact with
potential purchasers. The contract should state that you have the right
of final approval before any information is released. You should also
require your broker to agree that any party who's interested, after
receiving the general overview of the business, must sign a
confidentiality agreement with you before learning any more details.
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