Practical Concerns of Selling a Business 
Selling a business is a complex and emotionally taxing process involving many hours of data gathering, meetings, information exchange, financial questions, legal questions and intense negotiations. Every day, small business owners make mistakes when they sell their businesses which can cost them thousands of dollars. Hopefully, you can avoid some of these common errors.
Failure to plan. Timing really is everything in business transfers. Selling a business is a significant event in the life of a business owner and must be planned in advance to achieve the best result. It frequently takes six months to two years to sell a small business. Transfers to employees or family members may require even more time to implement. While the owner may be ready to sell for retirement or health reasons, the timing may not be optimal as far as the business is concerned. For example, if sales and profits have been declining, potential buyers and lenders will perceive that the business is in trouble and assume that the owner wants to sell because business is failing. If the company has had a bad year in one of the last three calendar years, lenders may be reluctant to lend money to the buyer.
Failure to maintain confidentiality. Letting the cat out of the bag early can undermine your business! Any prospective buyer should be required to sign a confidentiality agreement before you share information about your business. Otherwise, they may try to go directly to your customers or use your proprietary information without purchasing your business! If employees learn about a potential sale they may be worried about upcoming changes and may quit. Your customers may be concerned about the ability of the new owner to run the business and may decide to take their business elsewhere. Competitors could take advantage of this information.
Failure to properly value your business. Get a proper valuation of your business. Consider your industry, similar businesses, the economy and your marketplace when pricing your business. A buyer will focus on the anticipated earnings from the business’s established resources and look for a demonstrated successful track record. You need to determine the right price which will not scare off potential buyers while at the same time maximize the eventual price you receive. Pricing a business too low can cost you a lot in time and aggravation forcing you to deal with a multitude of buyers, many of whom may not even be serious or qualified to buy the business.
Failure to properly package your business. Having good, clean records is essential in any business transfer. A potential buyer will want information about your customer base, competition, financial history and industry characteristics, such as size, growth potential and areas of opportunity. Your financials may need be recast to properly reflect the value of your business. If revenue and expenses cannot be documented and supported it is unlikely that you will receive your asking price. If a buyer needs to obtain outside financing for a business and the records are not consistent, a bank may reject an application from the buyer for a loan.
Failure to prepare for proper due diligence. Due diligence issues are very important to the selling process. You must be prepared and organized. You must be able to defend and substantiate representations made during the selling process. Otherwise, the buyer probably will not proceed with the transaction or, if the buyer does proceed, the buyer will seek indemnity from you for damages the buyer incurs as a result of any incorrect representations.
Failure to secure qualified buyers. Evaluate your options and make the best selection for the long term. The best buyer is one who will close the transaction and pay you a good sales price. Consider the structure of the buyer’s payments. If business sales decline when the buyer takes over, will payment of any portion of the purchase price be at risk?
Failure to continue to run the business. It is important to maintain your business at peak operating capacity. Your buyer will request your latest P&L statement just before closing. If sales and profits are down, most likely the buyer will demand a significant price reduction.
Failure to plan for the sale of the business in your lease agreement. Before you sign a lease agreement, be sure you understand how the landlord will handle a request for transferring the existing lease to your buyer. Will the landlord agree to an assignment of the lease or require a new lease? Most likely, the landlord will charge a fee to handle the transfer to the new owner. If the existing lease does not permit transfers or assignments, the landlord may use the sale as an opportunity to increase the rent, which could affect the purchase price the buyer is willing to pay for the business. Banks may also require the buyer have a certain lease term before approving a loan for the buyer.
Failure to maintain a good attitude. Selling a business is a process of give and take. Business owners should try to keep an open mind concerning all aspects of the sale. It will be difficult to move forward with the transaction if you are inflexible. In many cases, it is better to try to work out a solution with a committed buyer than to try and find a new buyer.
Failure to understand the tax consequences of the sale. Owners should discuss how to structure the transaction with their CPA and understand the potential tax implications of the sale. Having a basic understanding of the tax ramifications before the process starts can keep a sale from bogging down later in the deal.
Selling a business is a complex transaction. For more information, please contact Kathy Tremmel at Tremmel Law, PLLC at (512) 539-0317 or kathy@tremmellaw.com.
Copyright 2017 Tremmel Law, PLLC. All rights reserved.
