When you are selling a business, the whole point of your interactions with a prospective buyer is to prompt a purchase offer. You're not just doing this for fun, after all.

The end goal is to move to the point where your buyer puts purchase intentions into writing and hands you - or your broker - a letter of intent to buy your business. Once those offers start coming in, it’s time to review each one and determine which most closely conforms with your exit strategy.

Here's what to do, what to expect, and how to proceed during these steps:

Step 1. Obtain the buyer's letter of intent to purchase.

The letter of intent puts your buyer's proposal in writing.

If you're working with a broker, that person will receive and discuss the buyer's purchase intentions. Otherwise, the offer will come to you directly. When it does, if it comes in the form of a conversation, don't start talking price and terms. Instead, ask the buyer to detail price and terms in writing so you can respond thoughtfully with input from your accountant, attorney and broker.

The "letter of intent" isn't a binding legal document, but it forms the basis for the all discussions leading up to a formal purchase offer. It will present the price, purchase structure, terms and purchase conditions your prospective buyer is proposing.

Step 2. Carefully review buyer's purchase proposal.

Happy as you'll be to receive a letter of intent, don't just sign on the dotted line. Too much is at stake. Instead, consult with sale advisors, including your broker, if you're using one, and your attorney and accountant. Discuss the following points:

The buyer's proposed price and payment structure

Likely the buyer will offer less than your asking price, which can become a point of later negotiation. The buyer also will describe how much will be paid in cash at closing and what kind of financing will be necessary, likely to include some percentage of the deal to be finance by you, the seller. Discuss the price and payment proposal with your accountant and attorney before discussing it with your buyer, because the payment structure will come with tax implications.

The buyer's proposed purchase structure

The vast majority of small business sales are "asset sales," but a few are "entity sales." The buyer will propose one or the other, likely based on the structure stated in your sale listing. Your accountant and attorney will advise you on the ramifications of either structure for your sale and tax situation.

The price allocation

The buyer may or may not describe a proposed approach for allocating the price but be prepared for this important topic, which greatly affects how sale proceeds are taxed and upon which the IRS requires you and the buyer to agree. Obtain your accountant's advice before discussing or accepting proposals on this topic.

Purchase exclusions or additions

Proposed exclusions or additions to your sale offering can greatly affect your sale proceeds and how they're taxed, and they can also affect the liabilities you retain after the sale closes. Get advice from your attorney or accountant before agreeing to variances.

Due diligence

Most buyers who are purchasing only the assets of a small business can complete due diligence in less than a month. Businesses with real property or extensive physical assets, or those selling as entity sales, often take longer. Be sure the letter of intent states a reasonable due diligence period and that it stipulates that no information obtained during this investigation will be shared beyond the buyer's purchase advisors without your express permission.

Warranties and representations

You'll need to guarantee that the facts you've presented about your business condition are accurate. Be sure your attorney reviews the warranties and representations clause, however, because you want to warrant accuracy to the best of your knowledge, but you don't want to warrant completeness, since there may be conditions of which you honestly aren't aware.

Seller's future involvement

The buyer's proposal may stipulate your after-sale transition-period or ongoing involvement with the business. It may also require you to sign a "covenant not to compete" with the business for a period of time after the sale. Work with your attorney or broker to review the timeframe for future involvement, as well as the timeframe constraints and geographic area defined by the non-competition proposal.

Additional stipulations

Expect the buyer's proposal to state:

  • Whether you're required to run the business as usual during the closing period (or whether the buyer asks for major agreements/purchases be put on hold).
  • That the offer is nonbinding.
  • Cancellation options
  • An exclusivity agreement that prevents you from considering competing offers during the due diligence period.

Step 3. Respond to the buyer's proposal.

Based on input and advice from your sale advisors, you'll either sign to accept the buyer's offer or you'll propose a counter offer.

As you respond to the buyer's letter of intent, remember this isn't the time to negotiate fine points. Your objective is gain agreement on the major elements of the buyer's proposal, including price, payment structure, exclusions or additions to the sale, timeframe, and your after-sale involvement.

Determining sale details will happen during the negotiation of final terms prior to drawing up the final purchase agreement and before the formal closing of the deal.

At this point, however, if your primary sale requirements differ greatly from the buyer's purchase intentions, you'll want to propose a counter offer, just as you'd do when accepting a purchase offer on your home. Involve your broker or your accountant or attorney to provide input, to share objective criteria, to serve as sounding boards and safety valves, and to help you avoid unnecessary disputes as you undertake the first of your buyer-seller negotiations.

Step 4. Accept the buyer's offer.

To accept the buyer's offer, you and the buyer will sign either the initial letter of intent or a version that reflects mutually agreed upon changes. Either way, once your signatures are on the line the letter signifies agreement to a purchase offer. Here's what typically happens next:

  • Your broker, if you're using one, will collect a deposit of, usually, 10 percent of the proposed purchase price, to be held in an escrow account.
  • If you're not using a broker, you and your sale advisors will decide whether to require a deposit from the buyer. If so, the deposit is called earnest money. If earnest money is involved, once it's collected it's held in a third-party escrow account until any conditions stipulated in the letter of intent are adequately addressed and the sale closes.

From this point, your sale moves into the due diligence stage. More work lies ahead, but for the moment, take a deep breath and realize you've successfully attracted an offer from a qualified buyer. Congratulations!

In next week’s installment of "Selling Your Small Business" we’ll go over how to conduct due diligence during the sales process.

Editor’s Note: This article is the eighteenth piece in a series taken from BizBuySell.com’s Guide to Selling Your Small Business. The guide is a comprehensive manual to help small business owners maximize their success when the day to sell arrives. Each Wednesday, Inc.com will publish a new section of the guide outlining BizBuySell.com’s best practices, from the initial planning stages of a sale all the way through negotiations and post-sale transition.