Entrepreneurs prefer to be involved in business. That makes sense, that's why they are entrepreneurs. 'Fringe business' such as a possible future sale is often not a subject entrepreneurs like to deal with. After all, 'running the business' is much more important. And rightly so!
That being said, it is time for every entrepreneur to stop at some point. To enjoy a well-deserved retirement, start something new or some other reason. Just because an entrepreneur quits doesn't necessarily mean the business stops. The sale offers a future for staff, the business, the name, customers and possibly for the entrepreneur himself in another capacity.
For many entrepreneurs, the decision to sell a business is a radical, well-considered one. After all, you only sell once, so you want to do it right the first time. It's not just about the price, but also about buyer sentiment and control of the process.
A successful sale feels good and is well organized. That means clear agreements and expert legal, fiscal and financial advice. This expert contribution offers a legal bird's eye view of the sales process and some legal points of interest.
Exploration: shares or assets/liabilities
Selling can be done roughly in two ways: through an equity transaction or an asset/liability transaction. In an equity transaction, the owner sells his shares, transferring the entire business including all rights and obligations to the buyer at once. This is often the simplest route. Still, this does not mean that an equity transaction is always the best choice.
In an asset/liability transaction, on the other hand, individual components are sold, such as inventory, current contracts and personnel. This form offers more flexibility: buyer and seller together decide which parts will or will not be transferred. This can be attractive in the event of specific wishes or risks.
Which form is most suitable depends on the situation, wishes and strategy of both parties.
Due diligence
Before a buyer is willing to buy a business, she will likely require a book review, a due diligence. This is a legal, financial and tax examination of the state of the business.
The seller will have to prepare to provide a whole mountain of documentation, such as financial statements, resolutions, contracts and personnel matters. The buying party then goes to work with this information and checks for red flags. The results form the basis for further talks, negotiations and the purchase agreement.
Purchase agreement
In both an equity transaction and an asset/liability transaction, the arrangements are laid down in a purchase agreement. This includes provisions on the price, payment, delivery, the sale and warranties. Those guarantees in particular often make for tough negotiations. The buyer wants to limit risks from the due diligence and therefore demands guarantees on, for example, finances, contracts and legislation. If a guarantee turns out to be incorrect, the buyer can claim damages from the seller.
For certain risks, it is explicitly agreed in an indemnity that the seller takes care of those risks. For example, if a lawsuit is still pending in connection with an industrial accident, the buyer does not want to be saddled with the resulting damages.
Such risk hedging is not unusual, but properly defining the scope and duration of warranties and indemnities is crucial.
So.
Don't wait too long to get your bearings in the acquisition process. Preparation really is half the battle. Tips:
- Take your time to explore the possibilities;
- Think about what you think your business is worth;
- Call an adviser who can further guide the sales process and advise where necessary.
