June 17th, 2021
Contents
June 17th, 2021
Rating
5 - 2 votes
Selling a business can be an exciting prospect - especially if you are selling it because it is worth more than when you started it! Many people also sell businesses because they are moving on to newer, bigger projects.
Regardless of the reason for the sale of the business, there are a lot of legalities involved and it can also be a really stressful thing to do. A business is like a house: It's a very large asset that requires a lot of thought for both a sale and a purchase.
In fact, a business often has many more documents and paperwork than the sale of a house. This is because the most important thing in a business sale is the valuation of the business (a valuation is how much a business is worth). Getting a true valuation of a business involves examining its financial assets and paperwork.
In this guide, we'll discuss the most important steps you should take in order to sell your business. Before we get started, please keep in mind this guide is not meant to constitute legal advice and instead should be taken as purely informational. Since selling a business is usually a very large proposition, it is a good idea to get legal advice specific to your situation from a licensed attorney in your state.
Without further ado, here are the seven most important steps to take in selling your business.
If you are the sole owner in your business, whether it is a single-member LLC or a sole proprietorship, you can likely skip this step.
However, if you've opened or joined a business with other people, such as a multi-member LLC, a partnership, or a small corporation, you'll definitely need to review the business formation documents to understand whether you are able to sell, and if so, how.
Your business will have different formation documents, depending on the type of business it is. You might have a signed Partnership Agreement, Articles of Organization, or a Founders' Agreement.
No matter what type of document it is, you should carefully review it to make sure you understand the conditions under which you can sell your business. If there are other people involved, it is highly likely you will need their consent and assistance.
If you aren't sure about what the documents say despite reading them thoroughly, you may want to get an attorney's help and analysis.
Although you may think you are fully aware of your rights, reviewing the business formation documents is still a critical first step in selling your business. You may also realize you need to sell your business for a specific reason that has an "easy out" in the business documents.
Final takeaway: Review the formation documents of the business before proceeding with an attempted sale.
Assuming that everything is okay with the business documents and you can proceed forward with the sale, the next step is to get a valuation.
Regardless of whether you plan to shop your business around or whether you plan to offer it to just one buyer, you'll still need to have a clear idea of what it is worth in order to finalize the sale. This is where a good business valuation comes in.
Getting a valuation of a business is similar to getting a valuation of a car. You'll find a specific appraiser (or appraisers, if you want more than one opinion, which is not a bad idea) to review detailed financial information about your business to give it a complete valuation.
Once you've obtained your valuation, you'll be ready to get the relevant sale documents together.
Final takeaways: Find a competent appraiser (or multiple appraisers) to get a valuation for your business.
Before you find a buyer for your business, you'll want to have all of the relevant documents ready to go. The documents you'll need will include:
1. Tax returns for the past several years (tax returns dating back 5-7 years is a good idea)
2. External audits done on your business in the past several years
3. A list of any items being sold with the business, such as physical equipment or electronic licenses or contracts
4. All relevant legal contracts that will need to be assigned to the new buyer (if they can be assigned)
5. Business formation documents
6. Your Operating Agreement or equivalent operating document
Work with your accountant or financial firm as needed to ensure all of your documents are accurate and up-to-date.
Final takeaways: Collect and organize the documents you will need for the sale.
At this point, you are ready to find a buyer. You may wish to search for a buyer yourself or you may already have someone in mind. The most common thing to do is to go through a broker.
Often, even if you work with other professionals, like an attorney or accountant, to get your business ready for sale, those professionals won't be specialized in finding a buyer.
Using a broker to help you sell your business will also likely mean that you'll get closer to asking price - maybe even the full amount!
Final takeaways: Begin to look for buyers and keep in mind that using a broker might be the best option.
At this stage, you'll likely be meeting with potential buyers. Hopefully, those buyers are making attractive offers!
Regardless, however, it's important to keep your expectations in check and require your buyers to get pre-qualified. The worst thing that can happen to any business counting on a sale is to find out that the buyer they've chosen to accept had their financing fall through. Because not everyone requires pre-qualification, this situation happens far too often.
If you are speaking to buyers seriously, require that they obtain finance pre-qualification so you know they are legitimate. Not only that: another important thing to do is to make sure you don't put all your eggs in one basket. Until the contract is signed, sealed, and delivered, never close off any of your options. In other words, allow yourself to speak to more than one buyer seriously until a deal is complete.
Final takeaways: Require pre-qualification before you speak to any buyers and keep your options open as long as you can.
If the business has any legal or financial obligations that are not assignable or transferrable, you'll need to ensure those are wrapped up before the sale can go through. These legal obligations might include contracts that specifically do not allow assignment or transfer.
Additionally, if there are financial obligations that specifically were excluded from the sale of the business (such as contracts for services incurred which need to be paid off before the sale is finalized), you should take care of those as well.
Final takeaways: Wrap up obligations that were not meant to be part of the sale of the business.
The last and final step is to transfer the ownership of the business. Depending on what form your business is organized, you may need to update certain forms with the state government where the business is registered. You may also need to amend operational documents. No matter what though, you'll likely need to draft and execute a Business Sale Agreement.
Final takeaways: Take all the final steps you need to transfer the business fully.
Although selling a business requires a lot of time and resources, it does not have to have additional roadblocks. The most important thing is to ensure that you take your time and carefully execute each step. You'll also most likely want to hire a licensed attorney in your state to assist you with all of the detailed legalities for your specific situation.
About the Author: Anjali Nowakowski is a Legal Templates Programmer at Wonder.Legal and is based in the U.S.A.