Buying or Selling a Business is a process. The below provides a framework to define the process and steps needed to buy or sell a business. The size and type of business that one may be buying or selling will influences the complexity of each of these steps.
1) INITIAL INFORMATION REVIEW– Confidentiality and Non-Disclosure Agreements are signed to assure confidentiality related to this private matter. Irreparable harm can occur if the confidential content of discussions and negotiations are improperly disclosed. Seller reserves right to approve potential buyers and may require that additional buyer information/capability be submitted before confidential information is released to the buyer of the business.
2) THE INITIAL MEETING: At the first meeting, the potential buyer of the business will want to know the seller’s motives for selling the company as well as more detailed information about the business and the seller will want to know how if the buyer is the type of person to whom he wants to sell the company. If the results of the initial meeting warrant further consideration of the deal, the buyer will next begin to evaluate the company and develop a financial structure for the proposed business purchase.
3) THE LETTER OF INTENT/PURCHASE CONTRACT: Either a contract with
contingencies or a letter of intent will be presented. A letter of intent may have an ” escape clause” in it to allow one or both parties the opportunity to withdraw from the deal if certain conditions are not met. The letter of intent will address :
- The purchase price/ consideration – Selling price of cash, notes, equity, or some combination of these.
- What is being purchased — Assets, liabilities, and operations that are being transferred to the buyer and those being retained by the seller should be identified.
- Structure — The parties need to agree about whether the sale will be a sale of assets, a sale of stock, a merger, or some other structure. Whether the SBA, bank, or owner takes back a note, the company cash flows must be able to support that loan.
- The definitive purchase agreement — As the buyer begins its detailed evaluation of the company, the attorneys will be preparing the purchase agreements. The Sales Purchase contract is usually drafted by the buyer’s attorney.
- Due diligence — The seller will need to have ready his financial records, all corporate records,pertinent contracts and all pertinent other documents that the buyer of the business will be requesting for review once the letter of intent or contract is signed. This will allow the buyer of the business to analyze the company in greater depth to determine whether everything has been represented properly, whether he wants to buy the company, and, if so, the appropriate price to pay. A purchase price is usually negotiated based in part on historical financial information. and future potential earnings.
- Escrow — The buyer will establish an escrow account into which his initial Good Faith deposit of monies shall be deposited and handled by a 3rd party escrow agent .
- Other significant items- non- compete terms, and employment contracts. leases and long-term purchase contracts, and any other pertinent business agreements shall be addressed.
- Professional fees – Usually the buyer and seller will bear their own costs for attorneys and accountants.
- Conditions and Timing for closing. Usually the closing is within two weeks after all contingencies have been completed, and like most steps in the buying or selling of a business this time is negotiable.
4) CLOSING– Once all issues have been resolved, the documents are signed, and the consideration exchanges hands, the deal is in condition to close. The actual closing marks the conclusion of the process.
Again buying or selling a business is a process and depending upon the size of the business and type of business this process from start to end can take several months or even longer. Due diligence when buying or selling a business is a very important part of this process. Negotiations are made at most every step of the process as new information becomes available and additional analyses are performed.
In a successful negotiation, both the buyer and the seller need to be flexible and to understand which points are important and which ones may be “deal breakers”. Most people may buy or sell a business maybe once in his or hers life. Following the advise of a trusted advisor such as a business broker can help increase the likelihood of a successful business sale or business acquisition.
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