Selling your Small Business (Part 1)

Many people spend a great deal of their adult life dedicating themselves to often stressful and difficult job of owning and running their own small business, which, rather arbitrarily, for purposes of this article, means one that employs anywhere from 5 to 100 employees, and could be sold for roughly anywhere between $500,000.00 and $5,000,000.00, depending on the type of business. There are some things that you can keep in mind ahead of time, or as the time approaches, that should make the process of selling your business a bit easier.

First and foremost, one thing to realize is that there is no science to it, and there is no standard set of terms or conditions. This is frustrating for some clients who assume there must be some sort of form sales agreement or universal set of conventions for dealing with various matters, that can just be plugged in. There is not. There are many issues that typically arise again and again, but how they are dealt with between a buyer and seller—even the process for dealing with them—is almost always more unique than not.

An important place to start is for you to consider what it is that you are actually selling, or will want to sell. As simple as this sounds, people sometimes lose sight of it, or never really put it in focus at the beginning.

On one level, this question of what you are selling is the question of whether you will be selling the individual assets of your business, or will you be selling your ownership interest in the business (e.g., your stock, if you own your business as a corporation, or your transferable interest, if you own your business in the form of an LLC).

Buyers typically prefer to buy the individual assets for a variety of reasons—but often primarily to avoid being exposed to potentially hidden liabilities. Sometimes if the business depends on one or more key, nontransferable (or non-easily transferable) licenses or contracts held in the name of the business, the buyer will want to buy the stock, instead. Often, however, the crucial license or contract will already have a clause to the effect that a change in the ownership of the business is tantamount to a transfer of the license or contract, and is therefore prohibited, or prohibited without the advance consent of the licensor or of the other party to the contract.

On another level, the question of what you are selling is a pragmatic, economic question. Sometimes the value of the business is in its tangible assets: machinery and equipment. Sometimes the business is worth next to nothing without one or more key contracts with third parties. Sometimes the value of the business consists in its “goodwill,” i.e., name recognition value, or even certain telephone numbers or web addresses. Sometimes there are valuable trademarks, copyrights, or patents. Sometimes there is a valuable customer list, or a valuable “book of business,” meaning, usually, very many contracts of short duration (perhaps annual contracts, such as insurance contracts) most of which the buyer expects will continue and be renewed after the sale. Sometimes there is valuable real estate. Sometimes there is valuable inventory or work in progress—although inventory alone, of course, does not make a business. Sometimes the buyer will pay the seller a significant amount simply not to compete with the buyer after the sale.

Not surprising, very different legal and business issues need to be addressed depending upon what is more or most valuable from an economic point of view. Unfortunately for sellers, sometimes when it comes right down to it, they have little to sell—for example, in situations where so much of the success of the business is bound up with the owner’s unique, personal skills.

One thing to keep in mind is that being well organized as a seller never hurts, and the sooner the better. Even if it seems like a “waste of time and energy” to you, I can almost guarantee you that in the process of selling your business, no matter what it is, and no matter whether you are selling assets or stock, you will be called upon, literally and physically, to produce at some point for your lawyer and/or your buyer, copies (paper or digital) of at least all of the following:

• the governing documents for all of your employee benefit plans;
• all of the governmental licenses and permits under which you operate the business;
• all of the computer software or other IP licenses important in your business;
• a list of all (or substantially all) of your tangible personal property (sometimes tax depreciation schedules are used, or used in part);
• promissory notes, loan agreements, and the like, evidencing any borrowing (or lending) by the business, and any personal guaranties;
• all of your leases and contracts of every kind (yes that includes things like copiers, telephone systems, trash removal, you name it);
• tax and information returns for the past several years;
• deeds to any real estate, title insurance policies, and any land surveys;
• bills of sale or other evidence of ownership for significant pieces of tangible property;
• all of your insurance contracts of any sort;
• financial statements;
• any correspondence, good or bad, to or from, any regulatory authority for the last several years;
• copies of all environmental surveys or investigations, pretty much from the start of time;
• certificates of title for all motor vehicles or other vehicles with title;
• dates of hire, present pay, and amounts of accrued leave for all employees; and
• articles of incorporation, bylaws, annual or other meeting minutes, stock or ownership certificates, and/or other forms of corporate records.

These are all things that perhaps in theory you should already have at your fingertips in various paper or digital files. But in practice the business of doing business sometimes leaves little time for this degree of ongoing organization. It is never too early, however, to get started, since the worst that can happen is that you have most of these things already organized, many of which might be helpful to you even if you are not presently in the process of trying to sell your business.

In future parts we will look at some of the legal and other issues that typically arise, such as financing, seller’s representations and warranties, indemnification, and employee matters, and also look at some process issues such as letters of intent, purchase and sales agreements, closing contingencies, and closings.