Selling a business is a significant undertaking that will have lasting consequences for the seller and their financial well-being. No matter why you’re considering selling, understanding the sales process is crucial for a successful transaction.

Why Sell?

Business owners decide to sell for various reasons, including retirement, health issues, and capital constraints. Sometimes the decision to sell arises a bit more spontaneously when a business receives an attractive offer from a prospective buyer. Greg Lafin of Wipfli LLP observes that as businesses scale there may, in turn, be more acquisitions in that space. In short, growth and expansion give way to consolidation. Depending on the space your business operates within, it may or may not find itself the target of these kinds of unsolicited offers.

However, regardless of why you decide to sell, it is critical to understand your motivations so that you are able to move forward with complete confidence. As Tom Goldblatt of Ravinia Capital emphasizes, uncertainty deters buyers. If a prospective buyer senses cold feet they could walk away.

Being Prepared

For business owners who are actively seeking a sale or those who would be open to one should the right opportunity arise, preparation is key. To this end, Phil Buffington of Balch & Bingham LLP stresses the importance of regularly reviewing your business operations and finances.

Beyond ensuring corporate records, contracts, financial statements, and inventory records are clean, organized, up to date, and easily findable key preparation steps include ensuring pending legal or tax issues are being addressed, and that employee retention plans are in place, particularly for key positions.

Understandably a prospective buyer will want to scrutinize your financial records not only to understand the health of the business in isolation and in comparison to industry peers, but also in order to ascertain its value. So that you have an understanding of how your business stacks up, Buffington recommends benchmarking your business against industry standards to assess performance.

The Traditional Sales Process Explained

While the experience of selling a business is going to be unique to the business, buyer, and industry, a sale typically involves the following steps:

1. Marketing the Opportunity: The sale is marketed to potential buyers through targeted outreach.
2. Screening Buyers: Interested parties are evaluated to ensure they have the financial capability and intent to proceed with a purchase.
3. External Disclosures: A teaser, which provides a brief overview of the business is shared with potential buyers. Interested buyers will need to sign a non-disclosure agreement before more sensitive and confidential information like the confidential information memorandum (CIM) is shared. The CIM is a comprehensive document detailing the business’s operations, financials, and market position.
4. Letter of Intent (LOI): An LOI outlining the proposed terms of the deal is executed.
5. Due Diligence: The buyer thoroughly examines the business’s records, finances, operations, and legal status.
6. Regulatory Approvals and Third-Party Consents: Any necessary regulatory approvals and third-party consents are obtained in order to proceed with the sale.
7. Purchase Agreement: The terms and conditions of the sale are finalized and memorialized in the purchase agreement.
8. Closing and Post-Closing: The transaction is finalized and any post-closing obligations are addressed.

Legal Considerations

According to Jonathan Friedland of Much Shelist common legal issues that can derail deals include:

• Incomplete or unclear ownership structures
• Unassignable or expiring contracts
• Gaps in intellectual property documentation
• Absence of non-compete or retention agreements for key employees
• Hidden liabilities, such as environmental concerns or pending litigation

Assuming no legal concerns or roadblocks like those above arise during the sale process, the representations and warranties made by the seller as part of the purchase agreement will provide a further sense of security for the buyer.

Representations and Warranties

Representations and warranties are formal statements the seller makes about the state of the business typically covering matters like ownership of assets, compliance, financial accuracy, and the absence of undisclosed liabilities. As Buffington notes, representations and warranties play a critical role in ensuring that the buyer can trust the foundation of the deal. For the seller, it’s essential to understand that any inaccuracies in these statements, whether intentional or not, can trigger indemnification. This means the seller may have to compensate the buyer for resulting losses.

It’s common to see negotiations around how long representations and warranties will survive after closing, financial caps on the seller’s exposure, and baskets (threshold loss amounts before claims can be made). Increasingly, some deals include representation and warranty insurance, which can shift much of the risk to a third-party insurer.

Covenants and Post-Closing Matters

Covenants are promises made by the seller or buyer regarding actions they will or will not take. These fall into two broad categories:

• Pre-closing covenants, such as maintaining the normal operations of the business, keeping assets in good condition, and obtaining necessary approvals.
• Post-closing covenants, such as non-compete and non-solicitation agreements, cooperation on transitional matters, and sometimes ongoing consulting arrangements.

A key post-closing matter is working capital adjustments. After closing, the final balance sheet is reviewed, and if working capital isn’t at the level agreed upon, the purchase price may be adjusted.

For sellers, post-closing obligations can significantly affect life after the deal especially if they include restrictions on future business activities. Buyers often rely on these covenants to protect the value of what they are buying and to ensure a smooth transition.

Final Thoughts

Selling a business is a complex journey that combines legal precision, financial strategy, and thoughtful planning. A well-run process can maximize value, minimize risk, and help avoid costly disputes. Remember, the goal isn’t just to sell; it’s to sell well. By preparing early, ensuring your legal, financial, and operational ‘house’ is in order, and surrounding yourself with trusted advisors, you should be able to navigate each stage of the sale process with minimal disruption and setbacks.

To learn more about this topic, view Selling A Business-101: A Step-By-Step Guide / Keys to a Successful Sales Process. The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with the panelists. Readers may also be interested to read other articles about selling a business.

This article was originally published here.

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