Three Mistakes To Avoid When Selling Your Business
Cashing Out: So, you’ve decided to sell your business…
You have spent the last few months, years, or decades of your life building your business. You’ve poured your time, effort, and a lot of yourself into making the business a success. Now, you’re ready to cash out, to get paid, and to move on to the next chapter of your life.
If this sounds like you, read on, because this article is all about how to avoid foreseeable risks and problems when selling your business. Keep in mind that there are far more issues to consider than just the three I discuss in this article. You almost certainly need a lawyer (and probably some other professionals) to help you sell your business, if you want to sell it the right way.
Trying to sell a business, yourself, to save a few bucks in the short term can cost you money in the long run. Nothing worth having comes without a cost. Focus on the long-term value you’ll receive when using professionals to help you reach your goals. In the end, the benefits you receive, more than likely, will be worth the cost.
Mistake #1: Selling equity, when you should sell assets, or vice versa.
When you sell a business–especially a small business–you need to ask yourself whether you’re going to sell the equity in the business (not relevant for Sole Proprietorships), or whether you’re going to sell the assets of the business. For purposes of our discussion, here, keep in mind, in both cases, we’re talking about either the majority or substantially all of the equity or assets, not just some of them.
If you have a Partnership, you need to refer to your Partnership Agreement. What does it say about who has the right to sell a Partnership Interest in the partnership, who has to approve such transfers, and what other conditions have to be met? What does the Partnership Agreement say about who has the right to sell (substantially all of the) partnership assets?
If you have an LLC, you need to refer to your Operating Agreement. What does it say about who has the right to sell a Membership Interest in the company, who has to approve such transfers, and what other conditions have to be met? What does the Operating Agreement say about who has the right to sell (substantially all of the) company’s assets?
If you have a Corporation, you need to refer to your Charter & Bylaws. What do they say about who has the right to sell shares of stock in the company, who has to approve such transfers, and what other conditions have to be met? What do the Charter & Bylaws say about who has the right to sell (substantially all of the) company’s assets?
Remember, whenever you are selling a Partnership Interest in an LLP, a Membership Interest in an LLC, or shares of stock in a Corporation, you are almost always selling securities. (A notable exception to the previous statement is an LLC that is member-managed.) When you sell securities, you have to comply with securities regulations at both the federal and state levels! This can be very, very expensive. Often, it makes sense to use a business broker or a securities broker to sell some or all of the Membership Interests or shares of stock in your company.
If you want to avoid dealing with securities laws and regulations, consider selling only the assets of the business. Then, properly dissolve the hollowed-out business entity; don’t just let it go into a state of Administrative Dissolution (i.e., become a zombie company). An asset sale has other benefits, too, which is actually a great segue to our next mistake to avoid.
Mistake #2: Unintentionally transferring a business’s liabilities to the buyer.
Sometimes, a buyer will assume (accept) the liabilities (debts, responsibilities, and other obligations) of the business, when they buy it. This most commonly happens when a business goes through an equity sale. There are some ways to limit the transfer of liabilities in an equity sale, but they usually involve work for the business’s General Counsel attorney(s) before a sale is contemplated.
Even when a business is sold in an asset sale, however, sometimes the buyer will expressly (specifically) assume some or all of the liabilities of the business. For example, if a business buyer wants to buy a retail store in a specific location, they may agree to have the seller assign to them, and they may assume all of the obligations under, the store’s lease from its landlord.
If you’re not careful about how you sell the business, sometimes its obligations will unintentionally be transferred to the buyer. Having proper agreements in place, including Assignment & Assumption Agreements specifically stating which liabilities of the business will be transferred (and which ones won’t be transferred) to the new owner, is very important.
Mistake #3: Letting emotions cloud your judgment.
Very rarely do buyers and sellers completely see eye-to-eye about the direction of the business, although they often say and do things in the time leading up to, or even during, a sale that might make each other think that they do. It is not uncommon for a buyer or seller to say or do something that reveals their true intentions, and upsets the other party. Perhaps even more common is disagreement over the value of the business or other emotionally-charged issues–whether or not to keep certain employees, for example.
Sellers should acknowledge that when a buyer purchases the business, it becomes the buyer’s business, and the seller no longer has any right to try to control or influence what the buyer does with it. The buyer is paying for the right to have exclusive control of the business after the closing of the sale. For the seller to continue to try to influence the business after the sale’s closing would deprive the buyer of the benefit of their bargain.
Moreover, sellers should acknowledge that everything is worth what its purchaser will pay for it. This is an ancient maxim often attributed to Publilius Syrus, a Syrian who was brought as a slave to Italy (by his wit and talent he won the favour of his master, who freed and educated him). This is wisdom to keep in mind always, but especially when the stakes are high.
Even though, ultimately, your business is worth whatever your buyer is able and willing to pay for it, having an independent valuation of your business performed by a reputable professional is a great idea. Consider hiring a reputable Valuation as a Service (VaaS) provider or analyst to provide an objective valuation of your business. There are many different business valuation methodologies from which to choose. Choosing the right one is very important; so, make the decision with the help of an analyst.
Often, it’s a great idea to agree, in advance, with your strongest potential buyer(s) about what analyst will provide the valuation, and agree to accept whatever valuation the analyst provides as the de facto value of the business, for the purposes of the sale. Then, after disclosure of the valuation, allow the prospective buyers to bid on the business.
Consider letting your attorney handle the bulk of the negotiations on your behalf. With my clients, I often use what I call the “Stoplight Method” of preparation for negotiation. I ask my clients for a list of things they will not accept (the Red Light); things they must have for the deal to go forward (the Green Light); and things they’d like to get or avoid, but which are negotiable (the Yellow Light). If you can effectively communicate these things to your attorney, he should be able to successfully negotiate an outcome you can approve.
Also, unless your attorney is a real hothead, he should be able to conduct the negotiations with a degree of objectivity that most laypeople would find difficult or impossible to have. This can make the negotiations more objectively reasonable–less emotionally charged–and lead to better outcomes for all parties.
Whatever you do, remember, selling a business is about getting on with the next chapter in your life. It’s about looking forward. So, whatever outcome you reach, in connection with the sale of your business, make sure it pushes you in that direction, and leaves you free to move forward without feeling weighed down by the past.
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