Tim Gillis, Attorney at Law of Jacksonville law firm GILLIS WAY & CAMPBELL was recently interviewed for his knowledge and experience on how to sell your business in Florida. In this interview, get important information and tips on selling your business from a legal standpoint.
Selling A Business
Q: What are the main steps to selling a business?
Gillis: Ideally selling a business is going to take a lot of planning. If you have to sell the business and are doing it last minute or as a fire sale, it is going to be a very bad result for you. I tend to tell people that maybe two years out from wanting to sell your business is when you need to start working on selling your business.
One of the most important things you can do is to make sure you have all the legalities taken care of so that everything is documented. All of your contracts with key vendors, employees, and suppliers need to be locked down and lined up. This is documentation you are going to want to have readily available to provide to potential buyers.
You will want to start working with your CPA to clean up your financials. The financials are what prospective buyers are going to look at when they are considering buying your business. They are going to analyze those financials because you are going to try to sell your business based on how wonderful it is and how much money you make. Prospective buyers will really look at the numbers hard.
Many small businesses and sophisticated buyers know that when you are running a small business, your job is to run as many expenses as possible through the business so you do not end up having to pay a lot of tax. However, when you are trying to sell a business, that is a bad thing because you want to show as much profit as possible.
When people look at the finances, a lot of times they will add things back that look like a personal expense but it was written off for tax purposes. Ideally you will be able to clean those up and not have any disputes. You want no lawsuits, no unpaid taxes, no intellectual property disputes, and to own everything that you say you own. Essentially, you have a lot of preparation when considering selling your business.
Q: How do I find a buyer for my business?
Gillis: When you are ready to take your business to market, there are several ways you can do it. This is especially true if it is a small industry, because you know the industry better than anyone else. It is a small group of people; therefore, your universe of potential buyers is not that large.
If you know of a big player in your industry that is doing a lot of acquisitions, then you know they have it down to a science and you know who your potential buyers are going to be. Sometimes, and particularly if you know them, you can actually initiate contact yourself.
Outside of that, it you are a larger business, it is usually a good idea to engage an investment banking firm. They will help you polish up the business, maximize the valuation, and generally take it to market. They put together the prospectus and they may even identify key industry players.
Sometimes private equity groups are active in your industry. At other times, they will reach out to other investment bankers to see if they know someone who might be interested. That process it not free though. It is an expensive process and typically you are paying them a monthly retainer of some amount as well as a success fee, where they get a percentage of the sale. However, the idea is that they are going to get you more money than you would otherwise get on your own.
I have actually seen an instance where a company was approached by a potential buyer and the company was not even considering selling the business. They were offered a certain amount of money. They then talked to an investment banking firm who asked, “Why not engage us and you only pay us if we get you more money than you otherwise would make?”
They company engaged the investment banking firm and the firm earned their fee well because they maximized the value of the business in the hands of the current owners. There are people in large acquisition companies whose job is to identify targets. They go out and hunt and find these targets. Ideally they can just work one-on-one with the owner from their perspective because they will probably drive a better bargain than if they have an intermediate that they are working through.
Q: What documents are involved with selling a business?
Gillis: There are numerous documents involved with selling a business. Sometimes the initial document will be a letter of intent, a term sheet, or a memorandum of understanding. They are all generally the same thing. These are non-binding documents and state, We are interested in buying your business and here are our initial terms.
Before that initial step, there is typically a confidentiality and non-disclosure agreement. This is especially important if you are trying to sell your business to a competitor. You want them to agree to this because if you are going to tell them everything about your business so they can evaluate whether or not they want to buy it, you want to ensure that they will not steal your secrets. It is typically the first step but sometimes not. It all depends on who you are selling to.
If you are a small startup and looking for venture capital financing, then generally speaking they are not going to sign a confidentiality and non-disclosure agreement. The reason for this is because they see a million businesses just like you and they are just not going to do it. However, if it is a concern and it is a real business, then you have your confidentiality agreement and non-disclosure usually followed by the term sheet, which can be negotiated because it has some key provisions in there.
Some key provisions include lockups, meaning you cannot go out and shop somewhere else for some period of exclusivity. There may be a breakup fee, but it is not that common.
Then you usually negotiate the key terms off of that. Generally speaking, it includes, This is how much we are going to pay and this is the stuff we want to buy.
That is usually followed by what they call definitive agreements, which is typically either an asset purchase agreement or a stock purchase agreement. It can sometimes be a merger agreement. That is a document that actually acquires. The definitive agreement will lay out in excruciating detail what is being paid, how it is being paid, how it is calculated, any adjustments that are going to be made to the purchase price, what exactly they are buying, what exactly they are assuming, and what they are leaving behind.
You will need to include representations and warranties such as: what stuff you own; a list of your creditors, vendors and employees; and state any known issues. You are required to swear the representations and warranties are true and that if anything represented in the contract is materially untrue, then you are going to have to give some money back. Usually there is a mechanism, an indemnification provision, put in the contract.
There are typically what we call ancillary documents that go along with the documents mentioned above. The ancillary documents could include a lot of employment agreements for key employees (which may be with the seller if they are going to stay on board for a little while), non-competes or non-solicitations, property assignments, and leases or subleases.
Sometimes there is an assignment and assumption agreement of contracts and intangibles. There will usually be a bill of sale which covers the tangible stuff that you are buying which goes along with the closing statements. There could also be a transition services agreement if you are going to be selling a division and will assist them in transitioning the division you are selling out. There are a lot of ancillary documents that can go along with the transaction as well.
Q: How do I get a business valuation when selling my business?
Gillis: A business valuation or using a broker or an investment banker is not a bad idea. Typically a business broker would be on the lower end of the market, like small mom-and-pop type shops. It might be an emerging company, an emerging growth company, or a middle market company.
An investment banker is for someone with about $2 million a year in sales or more. This business is something that a venture capital firm, private equity firm or strategic buyer would be interested in acquiring. Their fees vary but it makes sense, once your financials are straight, to get an idea in the market.
Unless you are knowledgeable about what businesses in your industry are selling for, it makes sense to get an expert advisor. The reason is because it varies widely by what type of business you have. Typically, it is a function of the profitability of the business that drives the price a purchaser is willing to pay. Sometimes there are other factors. If you are in a strategic market or have contracts with a high value for a buyer to come into, that could push your value up.