Selling A Business

Business partners, meanwhile, are often ideal business buyers when an owner is ready to get out. Indeed, many business owners—especially in professional practices—bring in partners for this express purpose. The advantages of selling to a partner are numerous: the need to search for a buyer—or to use an intermediary—is obviated; terms of payment are often easier to arrange; and the business transition is eased because of the familiarity that already exists between the partner and the enterprise's suppliers, clients, and customers. Small business owners looking to hand over the reins of a company to a partner, however, need to adequately prepare for such a step. Locating a suitable partner, structuring a partnership buyout, and financing a partnership buyout are all important and complex issues that require care and attention.

Finally, business owners also groom people within their organization to take over the business upon their retirement (or death or disability). Family-owned businesses often hand over the reins from generation to generation in this fashion. In many cases this transfer of ownership is made as a gift or included as part of the owner's estate.

MAKING THE SALE

Once the seller has found a buyer for his or her company, the next step is to arrange the structure of the transaction. In addition to determining whether to make a stock or asset sale (in the case of corporations), the seller and the buyer need to reach agreement on other terms of the sale as well.

Earn-Outs

An earn out is an agreement wherein the seller takes a portion of the selling price each year for a fixed period of time out of the earnings of the company under its new ownership. These agreements are sometimes employed when a seller cannot get his or her full asking price because of buyer concerns about some aspect of the business. As a result, some sellers insist on minimum payment amounts. In addition, since the seller's total compensation under this arrangement depends on the company's performance during the specified earn-out period, sellers often require that they be involved in management decisions during this period. Earn-outs can be calculated as a percentage of gross profit, net profit, sales, or some other mutually agreed-upon figure. Sellers, however, need to make sure that the measurement used is fair and easily verifiable.

Installment Sales

Under this common arrangement, the seller of the business receives some cash, but the majority of the purchase price is received over a period of years. The down payment for small businesses may range from as little as 10 to as much as 40 percent or more, with the rest paid out—with interest—over a period of 3-15 years.

Leveraged Buyout

A leveraged buyout or LBO is the purchase of a company through a loan secured by using the assets of the business as collateral. This option, however, places a greater debt burden on the company than do other types of financing.

Stock Exchanges

In instances where a large, publicly held company is the purchaser, business owners sometimes ask to be compensated with stock in the purchasing corporation. In such cases, the seller is usually required to hold on to the stock for a certain period of time—usually two years—before he or she has the option to resell it.

Buyers sometimes insist on a noncompetition clause as well. Such a covenant, which can be incorporated into the purchase and sale agreement or created as a separate document, usually stipulates a market area and/or a period of time (three to five years is common) in which the seller may not open a business that would compete with the enterprise that he or she previously sold.

CLOSING THE DEAL

Once a deal has been struck between the seller and the buyer of the business, various conditions of sale often have to be addressed before the deal is closed. These include verification of financial statements, transfer of licenses, obtaining financing, and other conditions. Most contracts call for these conditions of sale to be addressed by a specified date; if one or more of these conditions is not taken care of by that time, the agreement is no longer valid.

Provided that these conditions have been attended to, however, the parties can move on to the closing. Closings are generally done either via an escrow settlement or via an attorney who performs settlement. In an escrow settlement, the money to be deposited, the bill of sale, and other relevant documents are placed with a neutral third party known as an escrow agent until all conditions of sale have been met. The escrow agent then distributes the held documents and funds in accordance with the terms of the contract.

If an attorney performs settlement, meanwhile, he or she—acting on behalf of both buyer or seller, or for the buyer—draws up a contract and acts as an escrow agent until all stipulated conditions of sale have been met. Whereas escrow settlements do not require the buyer and the seller to get together to sign the final documents, an attorney who performs settlements does include this step.

Several documents are required to complete the transaction between business seller and business buyer. The purchase and sale agreement is the most important of these, but other documents often used in closings include the escrow agreement; bill of sale; promissory note; security agreement; settlement sheet; financing statement; and employment agreement.

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