Buying and Selling a Business
Whether you are buying or selling a business, there are certain steps you should take to prepare for this venture. Some steps, like negotiation, come with either buying or selling a business. Most steps, however, vary depending on whether you are buying or selling your business.
Selling Your Business
Identify What You are Selling
Before you put your business on the market for sale, there are some steps you need to take and some decisions you need to make. First, are you selling assets, or are you selling an entity? If you are selling your business’ assets, you are selling your trade secrets, the company-owned equipment, the widget makers, your patents, etc. If you are selling the entity, you are selling the entire business, including stocks in the corporation or membership interest, as well as the assets and liabilities of the business. Sellers often prefer selling the entity, as it cleanly separates them from the business. However, buyers can be cautious of purchasing an entity because of the fear of encountering unknown and unidentified problems within the business.
Get Your Ducks in a Row
Particularly if you are seeking to sell an entity, it is a good idea to check with the California Secretary of State to ensure your business remains in good standing. If you have failed to file the proper paperwork or overlooked a fee of some kind, you might not be in good standing. This, however, is easy to rectify once you know what the Secretary of State needs to get your business back in good standing.
You should also gather relevant documents, including:
- Contracts with vendors
- Teaming agreements
- Lease agreements
- Distribution agreements
- Employment agreements
- Shareholder agreements (corporations)
- Minutes of business meetings
- Company policies
- Articles of Incorporation and bylaws (corporations)
- Articles of Organization (limited liability companies)
- Any other documents that lay out the story of your business.
Create a Selling Memo
Your selling memo is a document which includes information about how the company operates, the management structure, an organization chart describing both positions and the employees in those positions, the products or services the business generates, the purchase price, and any business-specific facts, such as the requirement to sublease, purchase the building as well as the business, or any other relevant details.
Assess the Value of the Business
Business valuation is not for amateurs. You need a professional with familiarity in your business sector to value your business. Because they will require the documents referenced above (and more), your efforts getting your ducks in a row will serve a dual purpose. Both the business valuator and the purchaser of your business need these documents to assess the fairness of the price of the business.
Buying A Business
Review the Selling Memo
Once you find a business you are interested in purchasing, start by reviewing the business owner’s selling memo. The business owner will likely request you sign a confidentiality agreement before providing this memo. This is because the selling memo contains sensitive information about the business structure and financial health. It is a good idea to have an attorney review the confidentiality agreement to ensure its legality. Understanding the limits of how one can use the information found in the selling memo is critical.
Inspect the Business
Before buying a business, a buyer must perform due diligence. This includes taking the following steps:
- Review all contracts, including contracts with
- Team partners to government contracts
- Lease agreements
- Employment agreements
- Company policies and payroll
- Anyone else with whom the business has an ongoing relationship.
- Accounts receivable
- Corporate records
- Meeting minutes
- Annual reports
- Tax returns
- Profit and loss statements
- Balance sheets
- The valuation report.
Don’t Limit Your Due Diligence
While it is essential to inspect the business from the inside, it is also a good idea to broaden due diligence beyond the building where the business is housed. With the seller permission, reach out to vendors, customers, team partners, or business partners to learn more about the business, the business’ reputation, and the view of people on the outside. Of course, before doing this, a review of the confidentiality agreement terms is essential.
Negotiating the Terms of the Agreement
Whether you are buying or selling, negotiating the terms of the agreement is a necessary step. Unfortunately, both buyers and sellers may become emotionally attached to the idea of buying or selling a business and may not be the best people for this job. It is a good idea to hire an attorney to assist in both buying and selling a business, in part because they engage in negotiations with their head and not their heart. Topics commonly subject to negotiation include:
- The purchase price
- Representations regarding the business (this is a statement of facts regarding the business, its assets, and its liabilities)
- Warranty (this is an assurance the representations are true and correct)
- Financing (buyers and sellers are both cautioned there are limits on the amount of interest California business sellers can charge buyers)
- Lease/sublease agreements
- Any other topics related to the sale the parties desire.
Create a Purchase Agreement
A purchase agreement is a contract that details the terms of the sale. A solid purchase agreement is critical to protect the interests of both the buyer and the seller. At a minimum, the purchase agreement should include:
- The identity of the buyer
- The identity of the seller
- The scope of the sale (assets or entity)
- Purchase price
- Agreed upon financing
- Closing date
- Responsibilities of the buyer prior to closing
- Responsibilities of the seller prior to closing
- Seller representations
- Buyer representations
- Seller warranties
- Buyer warranties
- Non-compete agreements
- Confidentiality agreements
- Various legal provisions
Need a Business Lawyer?
Whether you are buying or selling your business, it is a good idea to hire a business law attorney to guide you through the process, create the necessary documents, review documents, negotiate the terms of the sale or purchase, and protect your interests. Attorney Mohsen Parsa is an experienced business attorney available to protect your interests in any business sale transaction. If you are in the greater Los Angeles or Orange County area, contact Mohsen Parsa for a free consultation at (949) 394-6930.