SELLING YOUR BUSINESS

Selling your business: Deciding Whether to Use a Broker

One of the first choices you’ll face is whether to engage a business broker or to handle the sale yourself. This decision can significantly affect the sale process, the price you achieve, and the time it takes to sell. If you already have a buyer interested or ready you may want to skip the broker. Choosing the right broker is critical, the wrong broker may have a weak network, delay your sale, or even spoil the deal. Find someone who knows what they are doing and is communicative. You do not want a broker who takes days to reply to your questions and requests.

Pros of Hiring a Broker

• Access to a Network of Buyers: Brokers often have an extensive network of potential buyers, including individuals, investment groups, and corporations looking to acquire businesses. They can list your business on many platforms giving you a wide reach and visibility to get buyers more quickly.
• Expertise in Marketing: A broker knows how to present your business in the best light. Afterall, they are going to make a nice commission on the sale so they will do their best to promote their listings. They can help prepare marketing materials that highlight the strengths and opportunities of your business, making it more attractive to buyers.
• Negotiation Skills: Experienced brokers are skilled negotiators. They can handle delicate discussions about price, terms, and conditions, striving to secure the best possible deal for you.
• Confidentiality Management: Brokers can help maintain confidentiality throughout the sale process, ensuring that sensitive information about your business doesn’t reach competitors, employees, or suppliers prematurely.

Cons of Using a Broker

• Commission Fees: Brokers typically charge a commission based on a percentage of the sale price, which can be substantial. This fee will reduce the net proceeds you receive from the sale. Usually, the Seller is required to pay this fee. Do not be afraid to negotiate that percentage, brokers are business people just like anyone else so nothing is set in stone. If you are dealing with a larger, more reputable brokerage firms, they might not budge on commission percentages but it’s worth a shot!
• Less Direct Control: When you hire a broker, you delegate many aspects of the sale process to them. While this can save time, it also means you have less direct control over how your business is marketed and presented to potential buyers.
• Potential Conflicts of Interest: In some cases, a broker may prioritize closing a deal quickly over getting the best possible terms for you. Your broker has a fiduciary duty to keep your best interest at heart but that is not always the case.

Brokers are a great choice to give you exposure and bring you interested buyers. Keep in mind that during this process you will be presented with many documents to sign, including the brokers representation agreement that might lock you in to having that broker be the exclusive person able to sell your business. That means that if you by some chance found a potential buyer on your own while signed up with the broker the broker would be entitled to that commission. It’s recommended that you speak with your attorney and have them review these agreements along with the purchase and sale agreements and all other agreements that will be required throughout the sale process.

Selling your business: Selling on Your Own

Deciding to sell your business independently can be a viable option. This route gives you complete control over the sale process and can save you a significant amount in broker commissions. Here are some reasons and insights into why you might choose to sell your business on your own:

Reasons to Sell Independently

• Existing Buyer Interest: Perhaps a family member, close friend, or trusted employee has expressed interest in buying your business. In such cases, the trust and familiarity already established can make the transaction smoother and more straightforward.
• Cost Savings: By not paying broker commissions—which can range from 5% to 10% of the sale price—you retain more of the proceeds. This is especially beneficial if you’re working with a tight profit margin.
• Greater Control: You oversee every aspect of the sale, from setting the price to negotiating terms. This control ensures the sale aligns precisely with your goals and expectations.
• Confidentiality: Handling the sale yourself allows you to maintain a higher level of discretion. You can control who knows about the sale, which can be crucial in preventing unrest among employees, customers, or suppliers.
• Simpler Transactions: If your business is relatively straightforward or you’re selling to someone who already understands its operations, the need for a broker diminishes.

What It Involves

Selling independently means you’ll manage all aspects of the sale, including:

• Marketing (if needed): Creating listings, advertising, and reaching out to potential buyers.
• Valuation: Determining a fair market price for your business.
• Negotiations: Handling discussions about price, terms, and contingencies directly with the buyer.
• Legal Documentation: Drafting and reviewing all necessary legal agreements.

Business attorney Tips

• Get a Professional Valuation: Even if selling to someone you know, obtain an independent business valuation. This ensures the price is fair and can prevent disputes later on.
• Hire an Attorney: While you might skip a broker, don’t skip legal advice. An experienced business attorney can help draft contracts, manage escrow, and ensure all legal bases are covered.
• Prepare Thorough Documentation: Organize financial statements, tax returns, contracts, and any other relevant documents. This not only speeds up the process but also builds trust with the buyer.
• Use Non-Disclosure Agreements (NDAs): Before sharing sensitive information, have potential buyers sign an NDA to protect your business secrets.
• Stay Objective: Emotional attachment can cloud judgment. Try to approach negotiations and decisions with a clear, business-focused mindset.

Considerations

• Complexity of Your Business: If your business has multiple revenue streams, significant assets, or complex operations, professional guidance can be invaluable.
• Your Experience: If you have prior experience in sales, negotiations, or business transactions, you’ll be better equipped to handle the process.
• Time Availability: Selling a business is time-consuming. Ensure you can dedicate the necessary time without neglecting daily operations.
• Legal and Regulatory Compliance: Be aware of all legal requirements, including permits, licenses, and regulations that need to be addressed during the sale.

Selling to Family or Friends? You still need a contract.

• Formalize Agreements: Even when dealing with loved ones, put everything in writing. This protects both parties and helps prevent misunderstandings. This is very important! Our firm has seen their fair share of verbal agreements gone wrong. Agreements should always be in writing.
• Open Communication: Discuss expectations, roles, and responsibilities openly. This includes what happens after the sale—is there a transition period where you’ll stay on to help?
• Consider Tax Implications: Selling to family members can have different tax consequences. Consult with a tax professional to understand any implications.
• Set Boundaries: Mixing business with personal relationships can be tricky.

Establish clear boundaries to maintain both the business transaction and the personal relationship.

Sell your business on your own: Advantages of Selling on Your Own

• Personal Touch: You know your business better than anyone. You can personally convey its value and potential to the buyer.
• Flexibility: Without a broker, you can be more flexible in negotiations and terms, tailoring the deal to suit both parties.
• Direct Feedback: Immediate communication with the buyer allows for quick adjustments and responses to any concerns or questions.

Challenges to Be Aware Of

• Emotional Strain: Negotiations can become stressful, especially if the buyer tries to undervalue your business.
• Lack of Market Insight: Brokers often have up-to-date market data. Without them, you might miss out on valuable insights about market trends or buyer expectations.
• Potential Legal Pitfalls: Missing a legal requirement can have serious consequences. Always ensure compliance with all laws and regulations.

Attorney advice when selling your business on your own

While selling your business on your own can save money and give you greater control, it’s essential to approach the process carefully. Here are some steps to consider:

• Consult Professionals: Even if you’re handling the sale yourself, consider hiring professionals for specific tasks:
• Business Attorney: To draft and review legal documents, manage escrow, and ensure compliance.
• Accountant: To help with financial statements, valuation, and tax implications.
• Business Valuator: To provide an objective valuation of your business.
• Educate Yourself: Familiarize yourself with the sales process, common pitfalls, and legal requirements. Knowledge is power.
• Plan Ahead: Start preparing your business for sale well in advance. This includes organizing financials, streamlining operations, and resolving any outstanding legal or financial issues.
• Maintain Confidentiality: Be cautious about who you share information with and how you advertise the sale to protect your business’s reputation and operations.
• Stay Organized: Keep meticulous records of all communications, offers, and agreements. This organization will help the process run smoothly and provide a clear paper trail.

The Role of Escrow in Business Sales

When selling your business, ensuring that both you and the buyer fulfill your obligations is crucial. That’s where escrow comes into play.

What Is Escrow?

Escrow involves a neutral third party holding funds, documents, and other assets until all the conditions of the sale are met. Think of it as a safety deposit box that neither you nor the buyer can access until both have held up your end of the deal.

Protections Offered by Escrow

• Security for Both Parties: Escrow protects you by ensuring that the buyer has the funds and is serious about the purchase. It also assures the buyer that they won’t pay until they get what they agreed upon.
• Reduces Risk of Fraud: Neither party can run off with the money or assets without meeting the agreed-upon conditions.
• Facilitates Smooth Transactions: Escrow agents are professionals who handle the paperwork and logistics, making the process smoother for everyone involved.

Insider Tips

• Choose a Reputable Escrow Agent: Not all escrow services are created equal. Ask for recommendations from your attorney or other business owners who have sold their businesses. A good escrow agent can make the process seamless, while a bad one can cause delays and confusion.
• Understand the Fees: Escrow services come with fees, and these can vary significantly. Make sure you know who is responsible for paying them—sometimes it’s split between buyer and seller, but this is negotiable.
• Set Clear Instructions: Be specific about the conditions that must be met before funds are released. This prevents misunderstandings later on. For example, specify that funds are released upon successful transfer of licenses, permits, or lease assignments.

Our Attorney advice when using escrow in selling your business

Using escrow is standard practice and highly recommended. It adds a layer of security and professionalism to the transaction. Our lawyers can help you set up and navigate the escrow process to ensure your interests are protected.

Setting Contingencies to Protect Yourself

When selling your business, you’ll encounter the concept of contingencies. But what exactly are they, and how do they work? Contingencies are specific conditions outlined in the purchase agreement that must be met for the sale to proceed. Think of them as safety nets that protect both you and the buyer, ensuring that certain critical elements are addressed before the deal is finalized.

Understanding Contingencies

Contingencies are like checkpoints in the sales process. They allow either party to back out of the deal without penalty if certain conditions aren’t met. For sellers, contingencies can provide assurance that the buyer is committed and capable of completing the purchase. For buyers, they offer a way to verify that they’re getting what they expect.

Importance of Contingencies

• Risk Management: Contingencies protect you if the buyer can’t secure financing or if other critical conditions aren’t met. They ensure that you won’t be left high and dry if something goes wrong on the buyer’s end.
• Flexibility: They allow you to address unexpected issues without being locked into the sale. If certain conditions change, contingencies provide a legal pathway to renegotiate or exit the agreement.

Common Contingencies in Business Sales

Understanding the typical contingencies can help you prepare and negotiate effectively.

1. Financing Contingency
   • What It Is: The sale depends on the buyer obtaining the necessary financing to purchase your business.
   • Why It’s Important: It protects both parties by ensuring the buyer has the funds to complete the purchase.
   • Your Consideration: Require the buyer to provide proof of financing within a specific timeframe. This prevents delays and weeds out buyers who may not be financially qualified.
2. Due Diligence Contingency
   • What It Is: The buyer must be satisfied with their examination of your business’s financials, operations, legal matters, and overall condition.
   • Why It’s Important: It allows the buyer to verify that the business is as represented and identifies any potential issues.
   • Your Consideration: Set clear parameters around the scope and duration of due diligence to prevent it from dragging on indefinitely.
3. Lease Assignment or Approval Contingency
   • What It Is: The sale is contingent upon obtaining approval from your landlord to transfer or assign the lease to the new owner.
   • Why It’s Important: If your business operates from a leased property, the buyer needs assurance they can continue operating from that location.
   • Your Consideration: Start conversations with your landlord early to facilitate a smooth transition.
4. Permits and Licenses Contingency
   • What It Is: The buyer must obtain or transfer necessary permits and licenses required to operate the business legally.
   • Why It’s Important: Without proper licensing, the buyer cannot legally run the business, which could halt the sale.
   • Your Consideration: Assist in identifying all required permits and offer guidance on the transfer process.
5. Regulatory Approval Contingency
   • What It Is: The sale may require approval from regulatory bodies, especially in regulated industries like healthcare or finance.
   • Why It’s Important: Ensures compliance with laws and regulations, avoiding legal issues post-sale.
   • Your Consideration: Be prepared to provide documentation and support the buyer through the approval process.
6. Partner or Board Approval Contingency
   • What It Is: If either party has partners, shareholders, or a board of directors, approval from these parties may be required.
   • Why It’s Important: Legally necessary to validate the sale and prevent disputes among stakeholders.
   • Your Consideration: Secure internal approvals before entering into a purchase agreement to prevent delays.
7. Appraisal or Valuation Contingency
   • What It Is: The sale is contingent upon the business appraising at a value acceptable to the buyer or lender.
   • Why It’s Important: Protects the buyer from overpaying and satisfies lender requirements.
   • Your Consideration: Provide accurate financial records to support your valuation.
8. Inventory or Asset Verification Contingency
   • What It Is: Verification that all assets, inventory, and equipment included in the sale are as described.
   • Why It’s Important: Ensures the buyer is receiving all the assets they are paying for.
   • Your Consideration: Conduct a joint inventory inspection and provide detailed asset lists.
9. Environmental Inspection Contingency
   • What It Is: Particularly relevant for businesses like manufacturing or automotive services, where environmental regulations are stringent.
   • Why It’s Important: Identifies any environmental liabilities that could be costly to the buyer.
   • Your Consideration: If applicable, obtain environmental assessments beforehand to expedite this contingency.

Removal of Contingencies

At some point, contingencies need to be removed for the sale to proceed to closing.

• How Removal Works: Once a contingency has been satisfied, the party benefiting from the contingency (usually the buyer) provides a written notice removing it.
• Consequences of Removal: After a contingency is removed, that condition is no longer a valid reason to back out of the sale without penalty.

Waiving Contingencies

In some cases, buyers may choose to waive certain contingencies to make their offer more attractive.

• Why Waive Contingencies: In a competitive market, waiving contingencies can make an offer stand out.
• Risks of Waiving: Waiving important contingencies, like financing or due diligence, can increase the risk of the sale falling through or lead to future legal issues.

Consequences When Contingencies Are Not Met

• Termination of the Agreement: If a contingency is not met and not waived, the party benefiting from the contingency can choose to terminate the agreement without penalty.
• Renegotiation: The parties may renegotiate terms to address the unmet contingency, such as adjusting the price or extending deadlines.
• Loss of Deposits: Depending on the terms, the buyer may forfeit their deposit if they back out without a valid contingency
• Be Specific with Deadlines
  • Set Clear Dates: Specify exact dates by which each contingency must be met or removed. This keeps the sale on schedule and prevents indefinite delays.
  • Example: “Buyer to secure financing approval by [specific date].”
• Limit the Scope
• Define “Satisfactory”: Clearly outline what constitutes satisfactory due diligence to prevent the buyer from backing out over minor issues.
• Example: “Satisfactory due diligence shall mean no discrepancies exceeding $5,000 in accounts receivable.”
• Include a “Right to Cure”
  • Opportunity to Fix Issues: If a contingency isn’t met, allow yourself the option to address and resolve the issue before the buyer can terminate the agreement.
  • Example: “Seller shall have 10 business days to cure any defects identified during due diligence.”
• Protect Against “Tire-Kickers”
  • Non-Refundable Deposits: After certain contingencies are met, require a non-refundable deposit to ensure the buyer is committed.
  • Example: “Upon removal of financing contingency, buyer’s deposit becomes non-refundable.”
• Communicate Regularly
  • Stay in Touch: Regular communication can help identify potential issues early and keep the process moving.
  • Document Everything: Keep records of all communications regarding contingencies to protect yourself legally.
• Consult Professionals
  • Legal Advice: Have an attorney review all contingency clauses to ensure they are fair and enforceable.
  • Broker or Advisor: Even if you’re selling on your own, consulting with a professional can provide valuable insights.

Business Attorney Advice on Contingencies

Contingencies are a double-edged sword—they can protect you but can also complicate the sale if not managed properly.

• Draft Carefully: Ensure all contingencies are clearly defined, with specific conditions and deadlines.
• Balance is Key: Too many contingencies can deter buyers, while too few can leave you exposed.
• Stay Proactive: Work diligently to meet your obligations related to contingencies to keep the sale on track.
• Seek Legal Guidance: Our attorneys can help you craft contingency clauses that protect your interests while keeping the deal attractive to buyers.

Down Payments: Refundable or Not?

Deciding on the terms of the down payment is a critical aspect of selling your business. The down payment not only serves as a financial commitment but also signals the buyer’s seriousness and ability to complete the purchase. Let’s delve deeper into how down payments work, what amounts are fair and typical, and how to structure them to protect your interests while keeping the deal attractive.

Purpose of a Down Payment

• Demonstrates Serious Intent: A substantial down payment indicates that the buyer is genuinely committed. It separates serious buyers from those who might be casually exploring options without real intent to purchase.
• Compensates for Time Off Market: Accepting a down payment justifies taking your business off the market during negotiations and due diligence.
• This ensures you’re not missing out on other potential buyers while focusing on the current deal.
• Provides Financial Security: It offers a degree of financial protection in case the buyer backs out without valid reasons, covering potential losses or expenses incurred during the sale process.

How Deposits Show Serious Buyers

• Financial Commitment: A buyer willing to put down a significant deposit is more likely to be financially stable and capable of completing the purchase.
• Skin in the Game: Buyers with money at stake are less likely to walk away casually, reducing the risk of wasted time and resources on your end.
• Negotiation Leverage: A substantial deposit can strengthen your position during negotiations, as it reflects the buyer’s eagerness and commitment.

Typical Deposit Amounts

• Industry Standards: Deposits often range from 5% to 10% of the purchase price. This percentage can vary based on the size and nature of the business, market conditions, and mutual agreement.
• Higher Deposits for Higher Risk: For businesses with higher risks or complexities, a larger deposit may be appropriate to offset potential uncertainties.
• Negotiable Amounts: The deposit amount is not set in stone. It’s open to negotiation and should reflect both parties’ comfort levels.

Refundable Down Payments

• Buyer-Friendly: If the sale doesn’t proceed due to unmet contingencies (like failed financing or unsatisfactory due diligence), the buyer receives their deposit back.
• Attracts More Buyers: Potential buyers may be more willing to enter into an agreement knowing their deposit is safe under certain conditions.
• Good Faith Gesture: Demonstrates trust and fairness, fostering a positive relationship between you and the buyer.

Non-Refundable Down Payments

• Seller Protection: If the buyer backs out without a valid, pre-defined reason, you retain the deposit. This compensates you for lost time and opportunities.
• Discourages Indecisive Buyers: Only buyers who are serious and confident in their ability to complete the purchase will agree to non-refundable deposits.
• Covers Expenses: Helps cover any costs you’ve incurred during the sale process, such as legal fees or valuation costs.

Hybrid Approaches

• Refundable to Non-Refundable Transition: Start with a refundable deposit that becomes non-refundable after specific milestones are met, such as:
  • Completion of Due Diligence: Once the buyer is satisfied with their investigation, the deposit becomes non-refundable.
  • Financing Approval: After the buyer secures financing, their deposit is locked in.
  • Lease Assignment Approval: If operating from a leased location, upon landlord approval, the deposit status changes.
• Partial Refundability: A portion of the deposit remains refundable under certain conditions, while the rest is non-refundable.

When Deposits Become Non-Refundable

• Clear Milestones: Define specific events or dates in the purchase agreement that trigger the shift to non-refundable status.
• Failure to Act: If the buyer doesn’t meet agreed-upon deadlines or obligations, the deposit may become non-refundable.
• Waiving Contingencies: Once the buyer waives certain contingencies, they are effectively committing to proceed, and the deposit becomes non-refundable.

Deductions from Refundable Deposits

• Administrative Costs: You may specify that if the buyer backs out, certain administrative or legal costs will be deducted before returning the deposit.
• Opportunity Costs: Consider including a clause that allows you to deduct costs associated with the business being off the market. These are not always common and suggesting things like this my frustrate the buyer and your broker.
• Agreed Expenses: Any specific expenses incurred at the buyer’s request (like specialized audits or reports) can be deducted.

Insider Tips from Business attorney when using escrow services

• Use Escrow Services
  • Secure Handling: Having the deposit held in escrow ensures funds are handled professionally and according to the agreement.
  • Clear Terms: Specify in the escrow agreement when and under what conditions the deposit is released or returned.
• Negotiate Terms Upfront
  • Open Dialogue: Discuss deposit terms early in negotiations to set clear expectations.
  • Flexibility: Be willing to adjust terms to find a balance that protects your interests without deterring the buyer.
• Document Everything
  • Written Agreements: Ensure all terms regarding the deposit are clearly outlined in the purchase agreement or a separate deposit agreement.
  • Legal Review: Have your attorney review all deposit-related clauses to ensure they are enforceable and protect you adequately.
• Consider the Market Conditions
  • Seller’s Market: If demand is high for businesses like yours, you might insist on a higher, non-refundable deposit.
  • Buyer’s Market: In a slower market, offering refundable deposits might attract more buyers.
• Assess the Buyer’s Credibility
  • Financial Standing: Verify the buyer’s financial capability to complete the purchase, which can inform how much deposit to require.
  • Track Record: If the buyer has a history of backing out of deals, a higher, non-refundable deposit can protect you.

Business attorney advice with down payments when selling your business

Striking the right balance with down payments is crucial. Here’s how we can help:

• Customized Structuring: We’ll assist in tailoring deposit terms that align with your specific situation and goals.
• Risk Mitigation: Our team can identify potential risks and incorporate provisions to protect you, such as specifying deductions for certain expenses.
• Negotiation Support: We can guide you through negotiations, helping you present your terms confidently and persuasively.
• Legal Assurance: By ensuring all agreements are legally sound, we minimize the risk of disputes over deposit terms.

Understanding the Due Diligence Period

The due diligence period is a critical phase in the sale of your business. It’s when the buyer thoroughly investigates every aspect of your operation to confirm its value and identify any potential risks. As a seller, your role during this time is pivotal, and how you handle due diligence can significantly impact the success of the transaction.

What Is Due Diligence?

• In-Depth Review: The buyer examines financial records, legal documents, operational processes, customer relationships, employee information, and more to ensure that the business is as presented.
• Verification: This process confirms that the business is in good shape, operates legally, and is worth the investment.

Your Responsibilities as the Seller

1. Providing Timely and Accurate Disclosures
   • Legal Obligation: You are legally required to disclose all material facts about your business that could affect its value or the buyer’s decision to proceed.
   • Timeliness: Disclosures should be provided promptly to avoid delays in the due diligence process.
   • Complete Transparency: Withholding information or providing inaccurate disclosures can lead to serious legal consequences, including lawsuits for misrepresentation or fraud.
2. Organizing Documentation
   • Financial Statements: Prepare audited or well-documented financial statements for the past three to five years, including income statements, balance sheets, and cash flow statements.
   • Tax Returns: Provide federal, state, and local tax returns.
   • Legal Documents: Include articles of incorporation, bylaws, operating agreements, licenses, permits, patents, trademarks, and any pending or past litigation documents.
   • Contracts and Agreements: Gather all contracts with suppliers, customers, employees, landlords, and any other relevant parties.
   • Employee Information: Prepare organizational charts, employee contracts, benefit plans, and payroll records.
3. Cooperating Fully
   • Accessibility: Be available to answer questions and provide additional information as requested.
   • Professionalism: Respond promptly and professionally to all inquiries to maintain trust and keep the process moving smoothly.
   • Confidentiality Agreements: Ensure that Non-Disclosure Agreements (NDAs) are in place before sharing sensitive information to protect your business interests.

Risks of Not Providing Proper Disclosures

• Legal Consequences
  • Lawsuits: Failure to disclose material information can result in legal action for misrepresentation, fraud, or breach of contract.
  • Rescission of Sale: The buyer may have the right to rescind the sale, requiring you to refund the purchase price and potentially cover additional damages.
• Financial Penalties
  • Damages: You may be liable for financial damages suffered by the buyer due to undisclosed issues.
  • Fines and Sanctions: Regulatory bodies may impose fines or other penalties for non-compliance with disclosure requirements.
• Reputation Damage
  • Professional Relationships: Your reputation within the industry could be harmed, affecting future business opportunities.
  • Loss of Trust: Buyers may be wary of dealing with you, making it harder to sell your business or other assets in the future.

Shifting Risk to the Buyer, doing an “as is” business sale

• “As Is” Sale
  • Definition: Selling your business “as is” means the buyer accepts the business in its current state, with all existing faults, and you provide minimal warranties or representations.
  • Limitations: While this approach can shift some risk to the buyer, it doesn’t absolve you from disclosing known material facts.
• Limited Warranties
  • Specific Representations: You can limit your warranties to specific aspects of the business, reducing your liability for unknown issues.
  • Negotiation: This approach requires careful negotiation and may affect the sale price or terms.
• Buyer Beware
  • Due Diligence Emphasis: By emphasizing that the buyer is responsible for conducting thorough due diligence, you can further shift risk.
  • Legal Protections: Include clauses in the purchase agreement that specify the buyer has had the opportunity to inspect the business to their satisfaction.

Important Considerations When Shifting Risk

• Legal Compliance: Even in an “as is” sale, you cannot conceal fraud or fail to disclose known material defects.
• Impact on Buyer Interest: Minimizing warranties and representations may deter buyers or reduce the price they’re willing to pay.
• Negotiation Balance: Finding the right balance between protecting yourself and making the deal attractive to the buyer is crucial.

Duration of the Due Diligence Period

• Typical Length
  • Standard Duration: The due diligence period usually ranges from 30 to 60 days.
  • Complex Businesses: For larger or more complex businesses, due diligence may extend to 90 days or more.
• Factors Influencing Duration
  • Business Size and Complexity: The more intricate your operations, the longer the buyer will need to review everything.
  • Industry Regulations: Highly regulated industries may require additional time for compliance checks.
  • Buyer’s Needs: The buyer’s familiarity with your industry and their internal processes can affect the timeline.

Extending the Due Diligence Period

• Negotiated Extensions
  • Mutual Agreement: Extensions are typically granted through mutual agreement if the buyer needs more time.
  • Valid Reasons: Extensions are more likely if there are legitimate reasons, such as delays in receiving third-party approvals or unexpected findings that require further investigation.
• Automatic Extensions
  • Contingency Clauses: Some agreements include provisions for automatic extensions if certain conditions aren’t met by specific dates.
• Seller’s Discretion
  • Right to Refuse: As the seller, you have the right to refuse an extension request, but doing so may risk the buyer walking away.
  • Consideration of Impact: Evaluate how an extension might affect your plans and whether it’s worth granting to secure the sale.

Strategies for Managing the Due Diligence Period

1. Preparation Is Key
   • Organize in Advance: Have all necessary documents and disclosures prepared before entering into the purchase agreement.
   • Professional Assistance: Engage accountants and lawyers to ensure all information is accurate and complete.
2. Set Clear Deadlines
   • Specific Dates: Include precise start and end dates for the due diligence period in the purchase agreement.
   • Milestones: Establish interim deadlines for specific information requests or tasks to keep the process on track.
3. Use a Data Room
   • Secure Access: Create a secure online data room where all documents are stored and can be accessed by authorized parties.
   • Version Control: Keep track of document versions and updates to ensure everyone is working with the most current information.
4. Maintain Open Communication
   • Regular Updates: Schedule regular check-ins with the buyer to address questions and provide updates.
   • Prompt Responses: Respond to inquiries quickly to prevent delays.
5. Address Issues Proactively
   • Anticipate Concerns: Identify potential red flags and prepare explanations or solutions.
   • Remediate Problems: If possible, resolve issues before they become obstacles in the due diligence process.

Potential Challenges and How to Overcome Them

• Discovery of Issues
  • Challenge: The buyer uncovers problems such as legal disputes, financial discrepancies, or operational inefficiencies.
  • Solution: Be honest about the issues, provide context, and, if possible, present a plan for remediation.
• Buyer Requests for Extensions
  • Challenge: The buyer asks for more time, which could delay the sale.
  • Solution: Assess the reasonableness of the request and negotiate terms that protect your interests, such as additional deposits or partial payments.
• Confidentiality Concerns
  • Challenge: Sharing sensitive information risks exposure to competitors or public disclosure.
  • Solution: Strengthen NDAs, limit access to sensitive data, and share critical information later in the process.

Legal Protections for the Seller

• Non-Disclosure Agreements (NDAs)
  • Purpose: Protect your confidential information from being shared or used improperly.
  • Enforcement: Ensure the NDA is legally enforceable and outlines penalties for breaches.
• Representations and Warranties
  • Limited Scope: Define the extent of your representations to minimize liability.
  • Materiality Thresholds: Specify that only material inaccuracies constitute a breach.
• Indemnification Clauses
  • Protection: Include clauses that limit your liability for certain issues discovered after the sale.
  • Caps and Time Limits: Set maximum liability amounts and timeframes for claims.

Our Insider Tips

• Prepare Thorough Disclosures
  • Accuracy Over Speed: Ensure all information is accurate, even if it takes more time to prepare.
  • Use Disclosure Schedules: Attach detailed schedules to the purchase agreement outlining all disclosures.
• Be Proactive with Issues
  • Full Transparency: Disclose known issues upfront to build trust.
  • Offer Solutions: Present ways to mitigate or resolve problems, demonstrating your commitment to a fair deal.
• Negotiate Reasonable Due Diligence Periods
  • Balance Interests: Offer sufficient time for the buyer to conduct due diligence without unnecessarily prolonging the process.
  • Set Extension Terms: Include conditions under which extensions may be granted, such as unforeseen delays outside the buyer’s control.
• Limit Representations and Warranties
  • Legal Counsel: Work with your attorney to craft representations that are fair but limit your exposure.
  • “Knowledge” Qualifiers: Use phrases like “to the best of the seller’s knowledge” to avoid absolute guarantees.
• Consider the Impact of “As Is” Sales
  • Market Perception: Understand that an “as is” sale may be less attractive to buyers.
  • Legal Obligations Remain: Remember that you still must disclose known material defects, even in an “as is” sale.

Our Advice Business Attorney Advice on due diligence when selling your business

The due diligence period is a crucial stage that requires careful preparation and strategic planning. Here’s how we can help:

• Preparation Assistance: We’ll guide you in organizing all necessary documents and disclosures to streamline the process.
• Legal Guidance: Our attorneys will help you understand your disclosure obligations and craft representations and warranties that protect you.
• Negotiation Support: We’ll assist in negotiating due diligence timelines and terms that are fair and reasonable.
• Risk Mitigation: Our team will help identify potential risks and advise on strategies to shift or minimize them appropriately.

Selling your business: The Closing Process

The closing process is the culmination of all your efforts in selling your business. It’s the final phase where ownership officially transfers to the buyer, funds are exchanged, and legal documents are executed. However, closing isn’t just a single event—it’s a series of coordinated steps that require meticulous attention to detail. Understanding what closing entails, including post-closing obligations, is crucial to ensure a smooth transition and protect your interests.

What Does Closing your sale Actually Mean?

In the context of selling a business, closing refers to the finalization of the sale transaction. It’s the point at which:

• Legal Ownership Transfers: The buyer becomes the new legal owner of the business assets or equity.
• Funds Are Exchanged: Payment is made according to the terms of the purchase agreement.
• Documents Are Executed: All necessary legal documents are signed and delivered.

Closing is not just about signing papers; it’s about ensuring that all conditions of the sale are met, all contingencies are satisfied or waived, and both parties fulfill their contractual obligations.

Steps Involved in the Closing Process

1. Finalizing Agreements
   • Review and Sign Legal Documents: This includes the purchase agreement, bill of sale, assignment of leases, intellectual property transfers, and any ancillary agreements such as non-compete clauses or consulting agreements.
   • Confirm Satisfaction of Contingencies: Ensure all contingencies outlined in the purchase agreement have been met or appropriately waived.
   • Reconciliation of Financials: Update financial statements to the closing date, adjust for any prorations, and confirm the accuracy of accounts receivable and payable.
2. Settlement Statement Preparation
   • Outline Financial Details: The settlement statement details the financial aspects of the transaction, including the purchase price, adjustments, prorated expenses, deposits, and any credits or debits to either party.
   • Agreement on Final Numbers: Both parties review and agree on the settlement amounts to prevent disputes after closing.
3. Transfer of Ownership and Assets
   • Physical Assets: Transfer possession of equipment, inventory, keys, access codes, and other tangible assets.
   • Intangible Assets: Assign ownership of trademarks, patents, copyrights, customer lists, and goodwill.
   • Contracts and Agreements: Assign or transfer contracts with customers, suppliers, and service providers, subject to any required consents.
4. Payment of Funds
   • Method of Payment: Funds are typically transferred via wire transfer, cashier’s check, or through an escrow agent as per the agreed terms.
   • Escrow Adjustments: If an escrow holdback is part of the agreement, those funds are retained according to the escrow instructions.
5. Regulatory Filings and Notifications
   • Government Agencies: File necessary documents with state and federal agencies, such as Articles of Amendment, UCC filings, or notifications to the IRS.
   • Licenses and Permits: Transfer or apply for new business licenses, permits, and registrations required for operation.
6. Notification of Stakeholders
   • Employees: Inform employees of the change in ownership and address any employment transitions.
   • Customers and Suppliers: Notify key customers and suppliers, ensuring continuity of relationships.
   • Creditors: Inform creditors of the sale to update accounts and address any obligations.
7. Update Legal and Financial Records
   • Corporate Records: Update the corporate minute book, stock ledger, and other official records to reflect the change in ownership.
   • Financial Accounts: Close or transfer bank accounts, merchant accounts, and credit facilities as appropriate.

Typical Timelines when closing your business sale

• Preparation Time (2-4 weeks or more)
  • Document Gathering: Collect all necessary documents, finalize agreements, and prepare for closing.
  • Coordination: Align schedules with the buyer, attorneys, accountants, escrow agents, and other involved parties.
• Closing Day
  • Execution of Documents: Sign all legal documents, often in the presence of a notary or at a formal closing meeting.
  • Exchange of Funds: Facilitate the transfer of payment as outlined in the purchase agreement.
  • Transfer of Possession: Handover of physical assets, keys, and access codes.

Post-Closing Activities (Immediate to Several Months After Closing)

1. Regulatory Filings and Notifications
   • Government Agencies
     • Final Tax Returns: You may need to file final income, sales, or payroll tax returns. Coordinate with your accountant to ensure all filings are accurate and timely.
     • Change of Ownership Filings: Submit necessary documents to federal, state, and local agencies to officially record the change in ownership. This might include updating business licenses, permits, or registrations.
     • Employee Benefit Plans: Notify relevant agencies about the termination or transfer of employee benefit plans, such as 401(k)s or health insurance.
   • Creditors and Financial Institutions
     • Notify Creditors: Inform all creditors of the sale to update records and settle any outstanding debts.
       Close or Transfer Accounts: Close business bank accounts or transfer them to the new owner as agreed.
2. Transition Assistance
   • Training and Support
     • Agreed Period: Provide training or consulting services to the buyer for a specified period, as outlined in the purchase agreement.
     • Scope of Assistance: Clarify what areas you’ll assist with—operations, customer relationships, supplier contacts, etc.
     • Compensation: Ensure any compensation for extended assistance is detailed in the agreement.
   • Access to Resources
     • Software and Systems: Facilitate the transfer of software licenses and access to operational systems.
     • Documentation: Provide manuals, procedures, and any proprietary information necessary for the business’s continued success.
3. Final Account Reconciliations
   • Adjustments Based on Post-Closing Events
     • Working Capital Adjustments: Reconcile any agreed-upon adjustments based on the business’s working capital at closing versus a target amount.
     • Earn-Out Provisions: If part of the purchase price depends on future performance, monitor and calculate these amounts as per the agreement.
     • Prorations: Adjust for prepaid expenses or accrued liabilities, such as rent, utilities, or insurance premiums.
   • Accounts Receivable and Payable
     • Accounts Receivable (A/R)
       • Retention or Transfer: Determine whether you retain the right to collect outstanding receivables or if they are transferred to the buyer.
       • Collection Efforts: If you retain A/R, outline who will handle the collection process and how.
       • Bad Debts: Address how uncollectible accounts will be handled and who bears the risk.
     • Accounts Payable (A/P)
       • Settlement of Debts: Clarify who is responsible for paying outstanding debts to suppliers and creditors as of the closing date.
       • Vendor Notifications: Inform vendors about the change in ownership and update billing information.
4. Indemnification Obligations
   • Understanding Indemnification
     • Definition: Indemnification clauses require you to compensate the buyer for certain losses or damages arising from breaches of representations, warranties, or covenants in the purchase agreement.
     • Scope of Liability: Be aware of the extent of your indemnification obligations, including any caps on liability and time limitations.
   • Common Triggers for Indemnification
     • Undisclosed Liabilities: Claims arising from debts or obligations not disclosed during the sale.
     • Legal Issues: Lawsuits or regulatory actions related to your period of ownership.
     • Breaches of Contract: Failure to fulfill any promises or covenants made in the purchase agreement.
   • Managing Indemnification Claims
     • Notification Procedures: The purchase agreement should outline how and when the buyer must notify you of any claims.
     • Defense and Settlement Rights: Understand whether you have the right to defend against claims or settle them.
     • Documentation: Keep thorough records and documentation that may be needed to address any claims.
5. Handling Money Coming in After Closing
   • Tax Credits and Refunds
     • IRS Refunds: If you are owed tax refunds for periods before the sale, ensure the purchase agreement specifies your right to receive these funds.
     • Tax Credits: Address how any tax credits, such as research and development credits or employment incentives, are allocated between you and the buyer.
     • Filing Responsibilities: Determine who is responsible for filing tax returns that may generate refunds or credits.
   • Insurance Claims
     • Pre-Closing Events: If there are pending insurance claims for events that occurred before closing, clarify who is entitled to the proceeds.
     • Ongoing Policies: Address the transfer or termination of insurance policies and any refunds of premiums.
   • Rebates and Supplier Credits
     • Outstanding Rebates: If the business is due rebates from suppliers or vendors for pre-closing activities, specify who receives these amounts.
     • Vendor Agreements: Review agreements to understand how credits or incentives are handled upon a change of ownership.
6. Non-Compete and Non-Solicitation Obligations
   • Adhering to Restrictions
     • Non-Compete Agreements: Refrain from engaging in competitive activities within the defined geographic area and time period.
     • Non-Solicitation of Employees and Customers: Avoid soliciting former employees or customers as outlined in the agreement.
   • Legal Enforcement
     • Compliance: Violating these agreements can lead to legal action, including injunctions and monetary damages.
     • Monitoring: Be mindful of your activities and communications to ensure compliance.
7. Employee-Related Obligations
   • Final Wages and Benefits
     • Payroll Settlements: Ensure all employees are paid up to the closing date, including any accrued vacation or bonuses.
     • Benefit Plans: Manage the termination or transfer of employee benefit plans, such as health insurance or retirement accounts.
   • Legal Compliance
     • WARN Act Notices: If applicable, comply with the Worker Adjustment and Retraining Notification Act by providing required notices to employees.
     • Severance Packages: Provide severance as required by law or company policy for employees not retained by the buyer.
8. Escrow Holdbacks and Contingent Payments
   • Understanding Escrow Holdbacks
     • Purpose: Funds may be held in escrow to cover potential liabilities, warranty claims, or to ensure performance of post-closing obligations.
     • Release Conditions: Clearly define the conditions under which escrowed funds will be released, including timeframes and dispute resolution mechanisms.
   • Monitoring Contingent Payments
     • Earn-Outs: If part of the sale price is contingent on future performance, closely monitor the business’s performance metrics as agreed.
     • Audit Rights: Ensure you have the right to review the buyer’s financial records to verify calculations of contingent payments.
9. Finalizing Legal and Financial Records
   • Corporate Documentation
     • Record Retention: Keep copies of all corporate records, financial statements, tax returns, and transaction documents for at least seven years, or as advised by your attorney.
     • Dissolution Filings: If applicable, file dissolution documents for your entity once all obligations are fulfilled.
   • Tax Obligations
     • Allocation of Purchase Price: Work with your accountant to properly allocate the purchase price among assets for tax purposes, as agreed with the buyer.
     • Form 8594 Filing: Both parties may need to file IRS Form 8594 (Asset Acquisition Statement) to report the sale.
10. Ongoing Compliance and Obligations
    • Regulatory Compliance
      • Post-Closing Audits: Be prepared for any audits or inquiries from tax authorities or regulators related to your period of ownership.
      • Environmental Obligations: Address any ongoing environmental responsibilities or remediation efforts.
    • Intellectual Property
      • Assignment of IP: Ensure all intellectual property rights are properly assigned, and any necessary filings are made with patent and trademark offices.
      • Protection of Confidential Information: Continue to protect any confidential information not transferred to the buyer, as per confidentiality agreements.

Business attorney tips for Post-Closing Success

1. Stay Organized
   • Maintain Records: Keep all documents related to the sale easily accessible in case issues arise.
   • Set Reminders: Use calendars or project management tools to track important dates, such as tax filing deadlines or escrow release dates.
2. Communicate Effectively
   • Open Dialogue: Maintain open communication with the buyer to address any post-closing issues promptly.
   • Professionalism: Handle all interactions professionally to preserve relationships and facilitate smooth resolutions.
3. Monitor Indemnification Periods
   • Time Limits: Be aware of the duration of your indemnification obligations, which may vary for different types of claims.
   • Liability Caps: Know the maximum amount you could be liable for under the indemnification clauses.
4. Engage Professionals
   • Legal Counsel: Consult your attorney before responding to any indemnification claims or legal notices.
   • Tax Advisors: Work with your accountant to navigate tax obligations and optimize your tax position post-sale.
5. Plan for Tax Implications
   • Capital Gains Taxes: Understand how the sale proceeds will be taxed and plan accordingly.
   • Installment Sales: If you received payments over time, be aware of the tax implications for each year.
6. Protect Your Reputation
   • Positive Transition: Assist in making the transition as smooth as possible to maintain goodwill in the industry.
   • Avoid Negative Publicity: Handle disputes discreetly and professionally to avoid damaging your reputation.

Our Advice

Post-closing activities are just as important as the steps leading up to closing. Here’s how we can help you navigate this phase:

• Comprehensive Planning
  • Identify Obligations: We’ll help you understand all your post-closing responsibilities, from regulatory filings to indemnification.
  • Develop a Timeline: Create a schedule of all post-closing tasks to ensure timely completion.
• Legal Guidance
  • Indemnification Management: We’ll advise you on responding to claims and help protect you from unwarranted liabilities.
  • Contractual Compliance: Ensure you fulfill all contractual obligations, such as non-compete agreements and confidentiality clauses.
• Financial Management
  • Accounts Reconciliation: Assist in settling any financial adjustments, including working capital or earn-out calculations.
  • Tax Planning: Work with your tax advisor to optimize your tax situation and comply with all filing requirements.
• Dispute Resolution
  • Proactive Approach: Address potential disputes early to prevent escalation.
  • Negotiation Support: If issues arise, we’ll represent your interests in negotiations with the buyer.

VIII. Assisting the Buyer in Securing Financing

Selling your business often involves helping the buyer secure the necessary financing to complete the purchase. Understanding the different types of financing available and how you can assist not only facilitates the sale but can also be advantageous to you as the seller.

Types of Financing Available to Buyers

1. Traditional Bank Loans
   • Overview: Buyers may approach banks or credit unions to obtain a loan. These institutions offer term loans with fixed or variable interest rates over a set repayment period.
   • Requirements: Banks typically require a strong credit history, collateral, a solid business plan, and sometimes personal guarantees.
2. Small Business Administration (SBA) Loans
   • Overview: The SBA offers loan programs that guarantee a portion of the loan made by lenders, reducing the risk for the bank.
   • Benefits: Lower down payments and longer repayment terms compared to traditional loans.
   • Requirements: The business must meet SBA size standards, and the buyer must be creditworthy and able to inject a certain amount of equity.
3. Private Investors or Venture Capital
   • Overview: Buyers may seek financing from private investors or venture capital firms in exchange for equity or a share of future profits.
   • Considerations: This can complicate ownership structures and may involve investors having a say in business operations.
4. Seller Financing
   • Overview: You, the seller, agree to finance part or all of the purchase price, essentially acting as the lender.
   • Benefits: Can make the sale more attractive and accessible to buyers who may not qualify for traditional financing.
   • Considerations: This can also be a very risky endeavor that takes much consideration. If the buyer does not pay you back you may never see your money if they declare bankruptcy. Seller financing should be done in very limited situations and should be done with as many protections as possible.
5. Leveraged Buyouts (LBOs)
   • Overview: The buyer uses the business’s assets as collateral to obtain financing, often involving significant debt.
   • Risks: High debt levels can strain the business’s cash flow post-sale.
6. Assumption of Existing Debt
   • Overview: The buyer assumes the existing debts or loans of the business as part of the purchase agreement.
   • Implications: This reduces the amount of new financing needed but requires lender approval.
7. Friends and Family Loans
   • Overview: Buyers may borrow money from personal connections.
   • Considerations: Informal agreements should still be formalized to prevent future disputes.

Understanding Seller Financing

Seller financing involves you providing a loan to the buyer for a portion of the purchase price. Instead of receiving the full amount at closing, you accept payments over time with interest.

Why Sellers Consider Offering Financing

1. Expand the Pool of Potential Buyers
   • Attract More Buyers: Not all buyers can secure traditional financing. Offering seller financing can make your business accessible to a broader range of purchasers.
2. Potentially Higher Sale Price
   • Negotiation Leverage: Buyers may be willing to pay a higher overall price in exchange for favorable financing terms.
3. Speed Up the Sale
   • Quicker Transactions: Reduces delays associated with bank loan approvals, allowing for a faster closing process.
4. Generate Interest Income
   • Additional Revenue: Earn interest on the financed amount, increasing your total return from the sale.
5. Demonstrate Confidence
   • Trust in the Business: Offering financing shows that you believe in the continued success of the business, reassuring the buyer.
6. Tax Benefits
   • Installment Sale Treatment: Spreading payments over multiple years may offer tax advantages by deferring capital gains taxes.

How Seller Financing Can Be Structured

1. Down Payment
   • Initial Investment: Typically, the buyer makes a substantial down payment, often ranging from 10% to 50% of the purchase price.
   • Purpose: Demonstrates the buyer’s commitment and reduces your risk.
2. Promissory Note
   • Legal Document: Outlines the terms of the loan, including the principal amount, interest rate, repayment schedule, and default consequences.
   • Customization: Terms can be tailored to fit both parties’ needs.
3. Interest Rate
   • Negotiable Rate: Should be competitive yet fair, reflecting current market rates and the risk involved.
   • Fixed or Variable: Decide whether the interest rate remains constant or can adjust over time.
4. Repayment Schedule
   • Flexible Terms: Payments can be structured monthly, quarterly, or annually, with options for interest-only periods or balloon payments.
   • Term Length: Commonly ranges from 3 to 7 years but can be adjusted based on the agreement.
5. Security and Collateral
   • Business Assets: Secure the loan against the business’s assets, such as equipment, inventory, or real estate.
   • Personal Guarantees: Require the buyer to personally guarantee the loan, providing additional security.
6. Default Provisions
   • Rights upon Default: Define what happens if the buyer fails to make payments, including repossession of the business or acceleration of the debt.
   • Cure Periods: Allow the buyer a specified time to rectify defaults before taking action.
7. Covenants and Restrictions
   • Operational Requirements: You may include covenants requiring the buyer to maintain certain financial ratios or operational standards.
   • Restrictions: Limitations on additional borrowing or asset sales without your consent.
8. Subordination Agreements
   • Priority of Claims: If the buyer obtains additional financing, you may need to agree on the priority of repayment between lenders.
9. Insurance Requirements
   • Life Insurance Policy: Require the buyer to maintain a life insurance policy naming you as the beneficiary to protect against unforeseen events.

Is There a Down Payment in Seller Financing?

Yes, most seller-financed transactions involve a down payment. The down payment serves several purposes:

• Reduces Risk: A significant upfront payment lowers the financed amount and shows the buyer’s financial commitment.
• Immediate Cash Flow: Provides you with immediate funds at closing.
• Motivates Buyer Performance: Buyers are more likely to fulfill their obligations if they have invested their own money.

Do Buyers Just Start Making Payments and Take Over?

In seller financing, after the down payment and execution of the promissory note, the buyer takes over ownership and begins operating the business. They make scheduled payments to you according to the agreed terms.

Key Considerations:

• Transition Period: You may agree to assist the buyer during a transition phase to ensure business continuity.
• Operational Control: Once ownership transfers, the buyer typically has full control, unless otherwise specified in the agreement.
• Monitoring: You may have rights to receive financial reports or inspect the business to ensure it’s being properly managed.

How You Can Help the Buyer Secure Financing

1. Provide Comprehensive Financial Documentation
   • Up-to-Date Financials: Supply recent financial statements, tax returns, and cash flow analyses.
   • Business Plan Support: Offer information that supports the buyer’s business plan and loan application.
2. Be Responsive and Accessible
   • Prompt Communication: Answer questions quickly and be available for meetings or calls with lenders.
   • Professionalism: Present the business positively to instill confidence in potential lenders.
3. Introduce the Buyer to Lenders
   • Existing Relationships: If you have relationships with banks or financial institutions, provide introductions.
   • Recommendation Letters: Offer letters of support or references if appropriate.
4. Assist with Valuation
   • Third-Party Appraisals: Facilitate appraisals or valuations that lenders may require.
5. Consider Partial Seller Financing
   • Bridge Financing Gaps: Offer to finance a portion of the purchase price to supplement the buyer’s loan.
   • Flexible Terms: Tailor the financing to fit both parties’ needs, potentially making the overall financing package more attractive.

Insider Tips

1. Assess the Buyer’s Creditworthiness
   • Due Diligence: Review the buyer’s credit history, financial statements, and business experience.
   • References: Request professional and personal references.
2. Secure Your Position
   • Collateral Agreements: Secure the loan with business assets, personal assets of the buyer, or both.
   • Personal Guarantees: Require the buyer to personally guarantee the loan, providing recourse beyond the business assets.
3. Set Clear Terms in a Formal Agreement
   • Legal Documentation: Have an attorney draft the promissory note and security agreements to ensure they are legally enforceable.
   • Define Default Consequences: Clearly outline what constitutes a default and the remedies available to you.
4. Consider Interest Rates Carefully
   • Competitive Rates: Set an interest rate that reflects the risk and is compliant with usury laws.
   • Consult Professionals: Work with financial advisors to determine appropriate rates.
5. Include Protective Covenants
   • Operational Oversight: Include terms that require the buyer to maintain insurance, properly manage the business, and not take on excessive debt.
   • Regular Reporting: Require periodic financial statements to monitor the business’s performance.
6. Plan for Worst-Case Scenarios
   • Default Planning: Be prepared for the possibility of repossessing the business or enforcing guarantees.
   • Exit Strategies: Consider how you would handle the business if you had to take it back.
7. Use an Escrow Service
   • Payment Processing: Utilize a third-party escrow service to handle payments and documentation.
   • Neutral Party: Provides a level of security and professionalism to the transaction.
8. Stay Involved (But Not Too Involved)
   • Transition Assistance: Offer help during the transition but avoid interfering with the buyer’s management.
   • Monitor Performance: Keep an eye on the business’s health without overstepping boundaries.

Risks of Seller Financing and How to Mitigate Them

1. Buyer Default
   • Risk: The buyer may fail to make payments, jeopardizing your income stream.
   • Mitigation: Require a substantial down payment, secure collateral, and include strong default provisions.
2. Business Failure
   • Risk: If the business fails, the buyer may be unable to continue payments.
   • Mitigation: Assess the buyer’s business plan and capabilities, and consider industry trends.
3. Legal and Regulatory Compliance
   • Risk: Improper documentation or failure to comply with lending laws can lead to legal issues.
   • Mitigation: Work with legal professionals to ensure all agreements are compliant with state and federal regulations.
4. Illiquidity
   • Risk: Your capital is tied up in the loan, reducing liquidity.
   • Mitigation: Plan your finances accordingly and consider whether you can afford to wait for payments over time.

Our Advice

Assisting the buyer in securing financing, particularly through seller financing, can be a mutually beneficial arrangement but requires careful planning and consideration.

• Professional Guidance: Engage attorneys and financial advisors experienced in business transactions to structure the financing safely.
• Due Diligence: Thoroughly vet the buyer to assess their ability to manage the business and repay the loan.
• Clear Agreements: Ensure all terms are explicitly stated in legally binding documents to prevent misunderstandings.
• Balance Risk and Reward: Weigh the potential benefits against the risks to determine if offering financing aligns with your financial goals and risk tolerance.
• Maintain Open Communication: Foster a collaborative relationship with the buyer to facilitate a successful transition and ongoing business success.

IX. Dealing with Lease Agreements and Landlords

When selling a business that operates from a leased location, the lease agreement becomes a pivotal component of the transaction. The terms and conditions of your lease can significantly influence not only the value of your business but also its attractiveness to potential buyers.

The Importance of Your Lease in the Sale

Your lease isn’t just a contract; it’s a strategic asset that can enhance or diminish your business’s value. A long-term lease with favorable terms provides stability and assurance to buyers, indicating that they can continue operations without the immediate risk of relocation or renegotiation. Features such as options to renew, reasonable rental rates, and tenant-friendly clauses make your business more appealing.

Conversely, operating under a month-to-month lease or one nearing expiration can deter potential buyers due to the uncertainty it presents. If buyers are unsure whether they can secure a new lease or if future terms might be less favorable, they may perceive a higher risk in purchasing your business. This is especially critical for businesses where location is key—like retail stores, restaurants, or service providers with an established customer base.

Negotiating with Your Landlord

Engaging with your landlord early in the selling process is crucial. Open communication fosters trust and allows you to address potential issues proactively. Always be polite with your landlord. Landlords sometimes act like Land Lords, you want to be on their good side. Inform your landlord of your intentions to sell and discuss the possibility of assigning the lease to a new owner. Understanding the assignment provisions in your lease is essential, as some leases have clauses that can complicate or even prevent an assignment without the landlord’s consent.

Building a cooperative relationship with your landlord can provide leverage during negotiations. Landlords have a vested interest in ensuring that the new tenant is financially stable and capable of honoring the lease terms. They may require financial statements, credit reports, or business plans from the prospective buyer to assess their suitability. Being prepared to assist the buyer in providing this information can facilitate a smoother transition.

It’s important to recognize that landlords might use this opportunity to renegotiate lease terms. They may request increased security deposits, higher rent, or personal guarantees from the new owner, especially if the buyer lacks an established credit history. Anticipating these possibilities allows you to prepare and negotiate terms acceptable to all parties.

Assignment of Lease vs. Obtaining a New Lease

When transferring a lease, you generally have two options: assigning your existing lease to the buyer or having the buyer negotiate a new lease directly with the landlord.

Assignment of Lease

Assigning your lease means transferring your rights and obligations under the existing agreement to the buyer. This approach maintains continuity and can be quicker, avoiding the need to negotiate a new contract. However, most leases require the landlord’s written consent for an assignment, which may not be guaranteed. Even after the transfer, you might remain secondarily liable if the new tenant defaults unless you negotiate a release from future obligations.

Obtaining a New Lease

Alternatively, the buyer can negotiate a new lease with the landlord. This option often releases you from any ongoing liability and allows the buyer to secure terms that align with their business plans. However, negotiating a new lease can be time-consuming and introduces uncertainty, as the landlord may propose less favorable terms or higher rent. Early introductions and supporting the buyer in these negotiations can help mitigate potential delays.

Potential Challenges and Solutions

One significant challenge is if the landlord refuses to transfer the lease or accept the new tenant. This refusal could stem from concerns about the buyer’s financial stability, preferences for a different type of tenant, or specific rights outlined in the lease. To address this, provide the landlord with detailed information about the buyer’s financials and business plan to alleviate concerns. Offering compromises, such as increased security deposits or personal guarantees from the buyer, might also help.

If the lease is short-term or on a month-to-month basis, it can negatively impact your business’s value due to the uncertainty it creates. Proactively negotiating an extension or renewal before selling can provide stability and make your business more attractive. Including options for the buyer to renew the lease at predetermined terms can also be beneficial.

Lease clauses that complicate assignments—such as change of control provisions, use restrictions, or assignment fees—pose additional hurdles. It’s advisable to have your attorney review the lease to identify and explain these clauses. Where possible, negotiate modifications to problematic clauses before initiating the sale and factor any fees or additional costs into the sale negotiations.

Best Practices for Working with Landlords

Maintaining a professional and cooperative approach with your landlord is key. Use formal written communications to document discussions and agreements, and involve your attorney to ensure all legal aspects are considered. Understanding your landlord’s rights and obligations, as well as any state laws that may affect lease assignments, is crucial.

Prepare the buyer by ensuring they have the necessary financial documentation and assist them in presenting a solid business plan to the landlord. Encouraging personal meetings between the buyer and landlord can help build rapport and trust, facilitating the approval process.

When the Landlord Refuses to Cooperate

If the landlord refuses to assign the lease or accept the new tenant, it can significantly impede the sale process. Potential buyers may be unwilling to proceed without a secured premises, which can diminish your bargaining power and reduce your business’s value. In such situations, exploring alternatives is important.

You might negotiate a lease buyout with the landlord, allowing the buyer to secure new premises. Another option is to consider relocating the business prior to the sale, although this can be costly and risky. If permitted, subleasing the premises to the buyer could be a temporary solution, but it may not relieve you of liability.

Legal options include reviewing the lease terms to determine if the landlord is unreasonably withholding consent, in which case you may have grounds to challenge the refusal. Mediation or arbitration can be effective in finding a mutually acceptable solution, but litigation should be considered a last resort due to its time-consuming and expensive nature.

Impact on Business Valuation

The terms of your lease directly affect your business’s valuation. Positive attributes like long-term stability, favorable rental rates, and transferability enhance the value. Conversely, short remaining terms, high rental rates, and restrictive clauses can reduce it. Buyers may demand price reductions or concessions to offset perceived risks associated with unfavorable lease terms. It’s important to adjust your business valuation accordingly and be prepared to negotiate.

Our Assistance

Navigating lease agreements and landlord relationships is complex but critical when selling your business. Our team can help by thoroughly reviewing your lease to identify any clauses that may hinder the sale and advising on steps to mitigate potential issues, such as renegotiating terms or securing extensions. We’ll assist in communicating with your landlord to secure favorable terms or necessary consents and facilitate introductions between the buyer and landlord to smooth the approval process.

We provide legal guidance in preparing or reviewing documents related to lease assignments or new lease agreements, advising on strategies to limit your liability. Additionally, we’ll work to improve lease conditions that enhance your business’s marketability and value, helping you present the lease situation effectively to potential buyers.

X. Offering Training to the New Buyer

When selling your business, one of the most valuable assets you can offer isn’t something tangible—it’s your knowledge and experience. Providing training to the new buyer can significantly enhance the appeal of your business, facilitate a smoother transition, and help maintain the value you’ve built over the years. This gesture not only benefits the buyer but also ensures that your legacy continues successfully.

Benefits of Providing Training

1. Smooth Transition

Transitioning ownership can be a complex process, especially if the buyer is new to the industry or your specific business operations. By offering training, you help the new owner acclimate to the nuances of the business, reducing the risk of operational hiccups. This hands-on guidance can cover everything from daily routines to handling unexpected challenges, ensuring the business continues to run efficiently from day one.

2. Maintaining Business Value

Your involvement during the initial stages post-sale can preserve the relationships you’ve established with customers, suppliers, and employees. A seamless transition minimizes disruptions, which is crucial for maintaining customer satisfaction and employee morale. By sharing your insights and introducing the buyer to key stakeholders, you help safeguard the goodwill that’s integral to the business’s success.

3. Enhancing the Deal’s Appeal

Offering training can make your business more attractive to potential buyers, especially those who may lack experience in your industry. It demonstrates your commitment to the business’s ongoing success and provides the buyer with confidence that they will have support as they take the reins. This added value can sometimes justify a higher selling price or more favorable terms for you.

Recommended Duration of Training

The length of training you’ll need to provide largely depends on the complexity of your business:

• Simpler Businesses: For businesses with straightforward operations, a training period of one to two weeks may suffice. This timeframe allows you to cover essential processes and address any immediate questions the buyer may have.
• Complex Operations: If your business involves intricate systems, specialized knowledge, or extensive networks of relationships, a training period of several months might be appropriate. This extended timeframe ensures the buyer fully grasps all aspects of the business.
• Negotiable Terms: Ultimately, the duration is negotiable and should be tailored to suit both parties’ needs. It’s essential to agree on a timeframe that feels comfortable for you and provides the buyer with adequate support.

Insider Tips for Effective Training

1. Define the Scope of Training

Be clear and specific about what the training will cover. Outline the key areas you will address, such as:

• Operational Procedures: Daily routines, use of equipment, software systems, and workflow management.
• Customer Relationships: Introduction to key clients, understanding their preferences, and how to maintain strong relationships.
• Supplier and Vendor Contacts: Details about procurement processes, negotiation tactics, and contacts within your supply chain.
• Financial Management: Insights into budgeting, financial reporting, and managing cash flow.
• Marketing and Sales Strategies: Sharing successful marketing campaigns, branding efforts, and sales techniques that have worked for your business.

By defining the scope, you set clear expectations and ensure that both you and the buyer are on the same page.

2. Set a Training Schedule

Establish a structured training schedule with specific times and dates for sessions. This approach:

• Manages Expectations: Both parties know when and how long each session will be, allowing for better time management.
• Ensures Comprehensive Coverage: A planned schedule helps cover all necessary topics without rushing or overlooking critical areas.
• Demonstrates Professionalism: It shows the buyer that you’re organized and committed to providing valuable training.
• Consider creating a training agenda or curriculum that outlines each session’s focus, objectives, and any materials needed.

3. Consider Compensation for Extensive Training

If the training required is extensive, particularly over several months or involving significant time commitments, it may be reasonable to negotiate additional compensation for your efforts. This could be structured as:

• Consulting Fees: Agreeing on an hourly or monthly rate for your time spent training and advising.
• Increased Sale Price: Adjusting the business’s sale price to reflect the added value of your extended support.
• Deferred Payments: Arranging for a portion of the sale proceeds to be paid after the training period, aligning your compensation with the buyer’s successful transition.

Ensure that any compensation agreements are clearly documented in the sales contract to prevent misunderstandings.

Our Advice on Including Training in the Sale

Incorporating training into your sales agreement can significantly enhance the attractiveness of your business and facilitate a smoother handover. Here are some considerations to keep in mind:

• Formalize the Agreement: Clearly outline the terms of the training in the sales contract, including duration, scope, compensation (if any), and any other expectations. This legal documentation protects both parties and provides a reference if questions arise later.
• Maintain Professional Boundaries: While it’s beneficial to be supportive, remember that the buyer will ultimately take ownership. Encourage their independence and decision-making to empower them as the new leader.
• Protect Confidential Information: Ensure that any sensitive information shared during training is covered by confidentiality clauses, safeguarding your business’s proprietary information.
• Plan for a Gradual Handover: Consider structuring the training to gradually reduce your involvement over time. For example, you might be heavily involved in the first few weeks, then move to an advisory role as the buyer becomes more comfortable.
• Be Open to Feedback: Encourage the buyer to ask questions and provide feedback on the training. This open dialogue can enhance their learning experience and build a positive working relationship.

XI. Handling Employees During the Sale

Your employees are a valuable asset. Deciding what happens to them is an important part of the sale.

Options

• Include Them in the Sale: Negotiate with the buyer to retain your employees.
• Layoffs: If the buyer doesn’t want to keep the staff, you may need to handle terminations in compliance with labor laws.

Making It Part of the Deal

• Benefit to Buyer: Experienced employees can make the business more attractive.
• Smooth Transition: Retaining staff helps maintain continuity in operations.

Insider Tips

• Communicate Carefully: Prematurely announcing the sale can cause anxiety or prompt employees to leave. Plan your communication strategy.
• Legal Obligations: Be aware of laws regarding employee notifications and severance, like the WARN Act.
• Retention Bonuses: Consider offering bonuses to key employees to stay through the transition.

Our Advice

Employment issues can be sensitive and legally complex. Our legal team can guide you through the process to ensure compliance and fairness.

Protecting Yourself from Post-Sale Liability

Selling your business is a significant milestone that often comes with a sense of relief and accomplishment. However, it’s crucial to recognize that your responsibilities may not conclude entirely at the closing of the sale. Post-sale liabilities can emerge, potentially leading to financial losses or legal disputes if not adequately addressed. Understanding how to protect yourself from these potential pitfalls is essential to ensuring a smooth transition and safeguarding your hard-earned assets.

The Impact of Post-Sale Claims

Even after handing over the reins of your business, you might find yourself facing claims related to your period of ownership. These claims can stem from various issues, such as undisclosed liabilities, contractual breaches, or regulatory non-compliance that occurred before the sale. For example:

• Undisclosed Debts: If there were outstanding debts or obligations not revealed during the sale, the new owner might seek compensation.
• Legal Violations: Non-compliance with laws or regulations, perhaps unknown to you at the time, could surface later and lead to penalties or lawsuits.
• Product or Service Issues: Defects or deficiencies in products sold or services provided during your tenure may result in customer claims or recalls.

These scenarios underscore the importance of taking proactive measures to shield yourself from potential liabilities that could erode the financial benefits of selling your business.

Indemnification Clauses: Your First Line of Defense

One of the most effective tools for protecting yourself is the inclusion of indemnification clauses in the sales agreement. An indemnification clause is a provision where one party agrees to compensate the other for certain losses or damages specified in the contract. In the context of selling a business, these clauses serve to:

• Allocate Risk: Clearly define which party is responsible for specific liabilities after the sale.
• Provide Remedies: Establish a contractual basis for seeking compensation if certain issues arise.
• Offer Assurance: Give both parties confidence that unforeseen problems can be managed without resorting to litigation.

For instance, you might include an indemnification clause stating that you will not be held liable for any claims arising from the buyer’s actions after the sale date. Conversely, the buyer might seek indemnification for losses resulting from your failure to disclose material information.

Limiting Your Liability: Strategies and Best Practices

To minimize your exposure to post-sale claims, consider implementing the following strategies:

1. Be Specific in Your Representations and Warranties

Representations and warranties are statements of fact and promises about the condition of your business at the time of sale. Being precise and thorough in these statements is crucial.

• Detailed Disclosures: Provide accurate and complete information about your business’s financial status, legal compliance, contracts, intellectual property, and any known issues.
• Use of Schedules: Attach disclosure schedules to the agreement that list exceptions or clarify details about specific representations.
• Avoid Absolute Guarantees: Instead of making unconditional statements, use qualifiers like “to the best of my knowledge” to limit your liability for unknown issues.

By clearly defining what you’re responsible for, you reduce the risk of disputes over misunderstandings or omissions.

2. Set Time Limits on Claims

Including time frames—often referred to as “survival periods”—after which the buyer cannot bring certain claims is a common practice.

• Survival Periods: Specify that representations and warranties survive for a defined period after closing, such as 12 to 24 months.
• Statute of Limitations Alignment: Ensure these periods align with relevant statutes of limitations to provide legal enforceability.
• Differentiated Durations: Critical representations, like ownership of assets, might have longer survival periods than general ones.

Setting time limits helps prevent indefinite liability and encourages prompt resolution of any issues that do arise.

3. Establish Caps on Liability

Another way to limit your risk is by setting a maximum amount—or cap—on the indemnification obligations.

• Monetary Caps: Agree on a cap that represents a reasonable portion of the sale price, such as 10-20%.
• Deductibles or Thresholds: Implement a “basket” provision where indemnification is only required if losses exceed a certain amount.
• Exclusions: Clearly state any exceptions to the cap, such as for fraud or willful misconduct, which might not be subject to limitations.

These provisions help manage potential losses and provide clarity on the extent of your obligations.

Industry Standards and What Is Typically Accepted

Understanding what is customary in your industry can guide your negotiations and expectations.

• Reasonable Caps: Caps on liability are common and often reflect a percentage of the purchase price appropriate to the industry’s risk profile.
• Survival Period Norms: Standard survival periods vary but generally range from one to three years, with some exceptions for fundamental representations.
• Use of Escrow Accounts: Holding a portion of the sale proceeds in escrow to cover potential indemnification claims is a widely accepted practice.
• Materiality Scrapes: Buyers may request that materiality qualifiers in representations be disregarded for indemnification purposes, which can affect your liability.

Being aware of these norms can help you negotiate terms that are fair and acceptable to both parties.

Additional Protective Measures

Beyond indemnification clauses and liability limitations, there are other steps you can take to protect yourself.

1. Purchase Tail Insurance

Tail insurance extends coverage for claims made after the sale related to events that occurred during your ownership.

• Types of Tail Insurance:
  • General Liability: Covers claims like property damage or personal injury.
  • Professional Liability: Protects against claims of negligence or errors in professional services.
• Benefits:
  • Extended Protection: Provides coverage during the period when claims are most likely to surface.
  • Peace of Mind: Reduces financial uncertainty post-sale.

Discuss with your insurance provider the appropriate tail coverage for your specific risks.

2. Avoid Absolute Warranties

Using absolute language in your representations can expose you to greater liability.

• Qualified Statements: Phrases like “to the best of my knowledge” or “except as disclosed” can limit your liability to what you are reasonably aware of.
• Due Diligence: Ensure you have conducted a thorough review of your business to support these statements.
• Negotiation: Buyers may push for stronger warranties, so be prepared to explain the rationale for your position.

This approach balances transparency with reasonable protection.

3. Obtain Professional Legal Review

Engaging experienced legal counsel is essential.

• Expert Drafting: Attorneys can craft clauses that accurately reflect your intentions and protect your interests.
• Compliance Assurance: Legal professionals ensure that agreements comply with applicable laws and regulations.
• Risk Identification: They can identify potential liabilities you might not have considered.

Investing in quality legal advice can prevent costly mistakes and disputes.

Preventing Future Issues Through Comprehensive Disclosure

Transparency is your ally in avoiding post-sale liabilities.

• Full Disclosure: Share all relevant information, even if it might be perceived negatively. Honesty fosters trust and can prevent accusations of misrepresentation.
• Documentation: Keep detailed records of all disclosures made during the sale process, including emails, reports, and meeting notes.
• Encourage Buyer Due Diligence: A thorough due diligence process can uncover issues early, allowing them to be addressed before the sale is finalized.

By proactively identifying and disclosing potential problems, you reduce the likelihood of disputes arising later.

Understanding the Buyer’s Perspective

Recognizing the buyer’s concerns can help you structure agreements that are acceptable to both parties.

• Desire for Protection: Buyers want assurances that they are not inheriting hidden problems that could affect the business’s viability.
• Negotiation Leverage: Being flexible and willing to address legitimate concerns can facilitate a smoother transaction.
• Mutual Benefit: A fair and transparent agreement builds goodwill, which can be valuable if future interactions are necessary.

Striving for a balanced agreement enhances the likelihood of a successful and amicable sale.

Final Thoughts

Protecting yourself from post-sale liability is a critical aspect of selling your business. By thoughtfully structuring your sales agreement, being transparent, and seeking professional advice, you can significantly reduce the risks of future claims. Remember that each business and transaction is unique, so tailor these strategies to fit your specific circumstances.

Selling your business should be a rewarding culmination of your hard work and dedication. Taking the time to address potential liabilities ensures that you can fully enjoy the fruits of your labor without unexpected challenges down the road.

We’re Here to Help

Navigating the complexities of post-sale liability requires expertise and careful planning. Our team of experienced legal professionals is ready to assist you in drafting strong indemnification clauses, setting appropriate liability limits, and advising on other protective measures. We are committed to helping you achieve a successful sale while safeguarding your interests.

Contact us today to discuss how we can support you in securing peace of mind after the sale of your business.

XVI. Frequently Asked Questions

Do I really need a broker to sell my business?

Not necessarily. While brokers can provide valuable services, you can choose to sell your business on your own, especially if you already have a buyer in mind. Consider your resources and comfort level with handling negotiations and paperwork.

What protections does escrow offer me as a seller?

Escrow acts as a neutral holding place for funds and documents until all sale conditions are met, protecting both you and the buyer from potential fraud or default.

Should I make the down payment refundable?

It depends. A refundable down payment can attract more buyers, but a non-refundable one offers you more security. You might opt for a partially refundable deposit based on certain milestones.

How long does the due diligence period usually last?

Typically, it lasts between 30 and 60 days, but the timeframe is negotiable and can be adjusted based on the complexity of your business.

Can I still be held liable under the lease after selling my business?

Yes, if you assign the lease, you might remain liable if the new owner defaults. Negotiating a new lease between the buyer and landlord can release you from future obligations.

Is it beneficial to offer training to the buyer?

Absolutely. It can smooth the transition, maintain business value, and make your business more attractive to potential buyers.

What should I do about my employees when selling my business?

Consider including them in the sale to provide continuity. If layoffs are necessary, ensure you comply with all legal requirements.

Why is full disclosure important in the sale process?

Full disclosure prevents future legal disputes and builds trust with the buyer, facilitating a smoother transaction.

How can I protect myself from liability after the sale?

Include indemnification clauses in your sales agreement, set limits on liability, and ensure all disclosures are thorough and accurate.

What are the pros and cons of lump sum payments versus payments over time?

Lump sum payments give you immediate access to funds but may have higher tax implications. Payments over time can result in a higher total price and tax benefits but come with risks like buyer default.