Tim Gillis, Attorney at Law of Jacksonville law firm GILLIS WAY & CAMPBELL was recently interviewed for his knowledge and experience on selling a business. Learn important information and tips.
For more information, read Selling A Business: What You Need to Know Part 2
Q: What are the various factors to consider when selling a business?
Gillis: When you are ready to sell your business, there are several factors that you need to take into account. Many of them are industry-specific. For example, a family owned restaurant is going to be treated differently than an IT consulting firm. What you want to look at on the industry side is whether there has been a lot of consolidation in your industry and the size of your company relative to the industry as a whole. Internally, you are going to want to know that you have a successor ready. Do you have a child or a key employee who can take over? In addition, you need to consider how much money you think you are actually going to be getting for your business.
Q: What do I need to know about purchase agreements?
Gillis: A purchase agreement is the contract where you are actually selling the business to the buyer. Purchase agreements usually take one of two forms. It will either be an asset purchase agreement or a stock purchase agreement. Sometimes a merger agreement is used, usually in a small or closely held business context, which is also an asset purchase agreement. What that means is the buyer is literally going to buy the assets from the business as opposed to buying the stock from the business. Generally speaking, it is safer for the buyer to do that because they will know exactly what they are getting and exactly what they are leaving behind. However, if you are in a regulated industry where there are licenses or something very specific to the company,then you will probably want to do a merger or an actual stock acquisition.
Q: After I find a buyer for my business, what are the next steps?
Gillis: Typically, once a potential buyer has been identified, you will want to do what is called due diligence. There may or may not be a non-binding letter of intent that is entered into before performing due diligence. In any event, before allowing a potential buyer to look at your books, records, contracts, and interview key employees, keep in mind that you will want them to sign a confidentiality agreement. Basically, after all the work you did up front by preparing your accounting and putting your contracts in order, the potential buyer will go through with a fine tooth comb. That can take a significant amount of time. Many deals die at that stage because there are issues and someone may not have prepared well enough. Assuming that the due diligence performed checks out, the next step might be a letter of intent, which may be binding or non-binding, or the parties may just enter directly into a purchase agreement.
Q: How do I get paid from the sale of my business?
Gillis: When you sell your business, there are a couple of ways you can get paid. Most people think you get all the cash up front at closing. However, that usually does not happen. When you sell to a key employee or to a child, you may typically finance over some period of time, and they will pay you back the money the business earns in the form of a promissory note. Taking security interest ensures that if the buyer were to default, you could take the business back. Sometimes a bank will give the buyer a loan for the purchase price and you can receive a chunk of cash up front. If you are selling to someone else in the industry, to a private equity firm, or to someone who is wealthy, then typically you will receive a large amount of the cash up front. At a later date, they will pay you the remainder. If there is a dispute over the value of the company, there can be an Earn-Out, in which your payment over time is actually tied to the performance of the business that you were selling after you sell it. These agreements have to be very carefully crafted.
Q: What are the first steps to selling my business?
Gillis: There are a number of steps to selling your business, which is typically a two to three year process. It is in your best interest to take time getting your company ready to sell. When you are first considering selling, you need to ensure that your business is in order. For example, clean up your accounting so your books and records are accurate. Many business owners run personal expenses through the business. You will want to stop that practice because it pushes down your profits and gets you a lower evaluation. Definitely clean up your books and make certain you document everything — all of your leases, your key contracts, all your employee contracts. Plan on having all of those things in place. You can go on and consolidate in what is called an online data room. Once you clean up your business, you can proceed to the next step.
Q: How do I find someone to buy my business?
Gillis: Finding someone to buy your business can be tricky. The usual situations are either you have grown so fast you cannot control the business anymore or you are ready to retire. If you do not have a child or a key employee to which you want to turn the business over to, you will want to find a business broker, if it is a small business. If it is a large business and something that a private equity firm or someone else in the industry would be interested in, you will want to use an investment banker.