Entrepreneurs

6 Things You Must Know When Selling Your Business to a Third Party

Don't second guess your decisions when selling your business. Instead, follow this expert's advice for doing it right.
6 Things You Must Know When Selling Your Business to a Third Party
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Author, Attorney and CPA
6 min read
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The following excerpt is from Mark J. Kohler and Randall A. Luebke’s book The Business Owner’s Guide to Financial Freedom. Buy it now from Amazon | Barnes & Noble | iTunes | IndieBound

Although selling to a partner or employee, a third party or a family member have the same basic elements, the process of selling to a third party is the most distinct and straightforward. Following are some of the most common issues faced by a seller in a typical third-party transaction to help you avoid some of the pitfalls I've seen clients fall into over the years.

Preparation

It's critical to start years in advance of when you may want to sell, especially if you're going to shop your business to third parties. A mistake many business owners make is that when they want to sell their business, they want to sell it now. This results in them selling far below the value of their business. Doing the work now and envisioning a day in the future when you'll sell can make the process much easier for you down the road.

Related: 10 Pieces of Financial Advice I Wish I Knew in My 20s

Finding a buyer

Finding a buyer can be one of the biggest challenges with this type of transaction. Let's walk through three options you have for finding potential buyers:

  • A business broker. Just like realtors help you buy and sell a home, business brokers are skilled and qualified agents who can help you find a buyer and act as a resource to you throughout the process. Yes, you'll pay a fee for the service, but it can be worth it. There really isn't a leading site for business sales, so start researching companies on the web that could help you in your particular industry and inter­view several before choosing.
  • A vendor or supplier. You may be shocked to discover that a vendor or supplier could be interested in expansion and getting into your line of business. You probably have a contact at most of these organizations that it would be appropriate to float the idea by to see if it's worth having more in-depth discussions. If you do start having discussions, make sure you sign a nondisclosure agreement early on. Privacy is critical, but your company data and security are even more important.
  • A competitor. It could be tricky to approach them and it might give them a competitive advantage with the knowledge you might be selling, but it could be a great strategy for you to approach a competitor if the political climate is appropriate to do so.

Due diligence

Related: How to Invest $1,000 and Grow It Into $1 Million

Your potential buyer will be doing their due diligence by asking to see all documents and records associated with your company. Don't be shocked when a buyer wants to see everything about your business. You're probably asking a pretty penny for it, so it should be expected that the buyer will want to double-check all your data and assertions. Show them the details of your normalized EBITDA, your systems, procedures and intellectual property. With a proper NDA, this is your time to let your business shine and show why you're asking so much for your business.

Negotiation

Because there are many moving parts to a sale, negotiations can hinge on any of hundreds of complex topics. The fact is, everything is negotiable. Unless you negotiate on a regular basis in your business already, I suggest you read a number of good articles and/or books on negotiation before going into this process. You're negotiating your financial freedom!

This can also be the phase of the deal where your advisors and especially your lawyer, can be worth their weight in gold. A good lawyer can close the deal and find a way to make it a win-win for everyone. Make sure you're extremely comfortable with your attorney and the role they're going to play.

Related: 10 Financial Mistakes Rich People Never Make

Document prep and review

Who's the right lawyer for a business sale? Regrettably, it may not be your family attorney. Although you trust them and they won't rip you off, they may not handle purchase and sale agreements on a regular basis. There are a lot of tax issues and legal exposure topics that just aren't common in other areas of the law. Try to get a business attorney to handle the transaction, and make sure they have a strong tax background, or ensure that your tax advisor is at the table at all points of the discussion.

Most importantly, make sure you understand every line of the contracts and agreements. The primary purpose of the lawyer is to draft the agreement and explain it. If you don't understand something, stay at the table until you do. Remember -- you're paying them, so get your money's worth.

Closing and asset transfer

You'll want to work closely with a buyer to make sure the transition is handled in the most appropriate way to create a win-win. I suggest you work really hard at being a diplomat after closing, even if you aren't paid a consultation fee. The buyer's ability to pay is oftentimes directly related to the ongoing success of the company, so help them succeed without giving away too much of your time, but ensure they're off and running smoothly.

Typically, the closing will be at an escrow office or title company, but it can also be handled between law firms, the procedure and goal being that the "keys" to the business are handed over at the same time the money/down payment is delivered and documents signed. Do not, and I mean do not, take money or give control of your business until everything is reviewed, approved and signed. It shocks me how many people start the transfer of a business on a handshake. Many of these situations turn into selective memory issues and a "he said/she said" argument resulting in a lawsuit. Regrettably, you can't trust anyone. Protect yourself, your assets, your business and your legacy.

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