By UpCounsel Corporate Attorney Umar Farooq

The opportunity to sell your business may arise in various ways. You may be approached by a key customer or commercial partner. A key manager or employee may come across a resource. In some cases, a business broker (or investor banker) may approach you on behalf of a party who has shown an interest in purchasing a business in your industry. In certain cases, you may actively list your business on an online business sale platform and except to get leads.

The sale process can be long and complicated. Give yourself at least 6 months to work on your financials to make sure they will be ready when you get interest from a potential buyer. In fact, you may start the process 12-18 months ahead of time to make sure you have gone through at least one good set of yearly financials to share with buyers. Generally, buyers may ask for 3-5 years financials for most transactions.

Here are some tips that may help you plan for the negotiations that are to follow:

1.  Team

You will go through a lot less stress during the negotiation and may get a better price by hiring the right broker or investment banker to get the sale done. You will also need to hire accountants and lawyers to work on closing the transaction.

For brokers, I would suggest that you talk to a few brokers before picking one. At lower price points, it is difficult to find a good broker who will look out for your interests and get you the better deal. You should also check with others who have recently sold businesses to see if they have used anyone that can be trusted.

For hiring accountants and lawyers, use your best judgement. For lawyers, you may consider UpCounsel.

2. Asset Versus Stock Sale

Generally, there are three methods of selling a business: asset sale, stock sale or a direct or indirect merger. Sellers usually prefer a stock sale as they may have no lingering liabilities (except any post-closing obligations to the buyers).

3. Confidentiality Agreement

When contemplating deals with potential buyers who may be competitors, sellers should determine before sharing any confidential information whether the buyer has a real interest in purchasing the business or is just fishing for information to gain competitive advantage.

4. Letter of Intent

Seller should ensure that the buyer commits to a firm price (if possible) and has very few “puts” to back out of the deal. It is a good idea to sign a letter of intent, heads of terms or a term sheet early on before opening your books to a potential buyer.

Sellers should insist on a deposit and a possible break-up fee in case the buyer decides not to proceed with the purchase.

5. Due Diligence

When responding to request for information from buyer, only disclose what is necessary.

Buyers may be interested conducting review of your business, financial and legal documents. Some of the key areas of concern are corporate documents, commercial agreements, real estate (if any, including leases), employment agreements, intellectual property (for technology companies), customer lists and any regulatory or licensing approvals, if applicable.

In larger transactions, the buyers may expect you to prepare a data room so it is easier for buyers and their advisors to access and review your company documents.

6. Transaction Documents

The sale will either be structured as an asset purchase and stock purchase agreement. For asset purchase, you may need to enter into additional assignment agreements.

In both cases, the buyer will keep you on the hook if things do wrong after closing. Buyers may insist on an earn-out over time or a post-closing escrow for anything that is uncovered during due diligence.

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About the author

Umar Farooq

Umar Farooq

With over nine years of experience, including time at a global law firm, Umar is able to provide personal service and practical solutions to tackle your most challenging legal issues.

Whether it’s helping to get your business off the ground or handling tough negotiations in a pivotal transaction, Umar is available to provide insightful legal counsel and trustworthy guidance.

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