Buying or Selling A Business
Thinking about buying or selling a business? Colorado is full of entrepreneurs and startup companies feeding their ideas and powering the local economy. Many of these companies are up for sale along with established companies with track records of success. To successfully buy or sell a business takes a combination of intelligence, skill and on occasion, a good dose of luck.
The steps to properly buying or selling a business include drafting a letter of intent, reviewing financial information, making written offers, exercising due diligence, obtaining financing and closing on the sale. In this article, we will briefly explain the general purpose of each step in the process. In future articles, we will delve into the details.
The process of buying or selling a business typically starts with a letter of intent. While there are no set rules, a letter of intent lays out the approximate purchase price of the business and outlines what needs to occur in order for there to be a formal offer. The seller is not supposed to negotiate with another buyer while a letter of intent is pending. If the general terms of the sale are agreeable, the buyer gets a better look at the financial statements and other key documents of the seller.
The initial review of the financial statements and other key documents can occur before or after the letter of intent. The idea is to give the buyer a general idea about the financial condition of the company and let the buyer decide what an acceptable purchase price will be.
Once the buyer has reviewed the financial statements and other key documents, it is time for a written offer of purchase. Offers of purchase are usually drafted by the buyer’s attorney and then negotiated with the seller’s attorney. These written offers can range in length from a few pages to several volumes depending on the complexity of the transaction. The written offer should address the purchase price, financing, representations and warranties, key man clauses and non-compete agreements.
If the buyer and seller can come to agreement on the contract terms, a contract is formed. The process now moves into a critical phase called due diligence. Due diligence can mean different things to different people. The extent of the due diligence requirement depends on the complexity of the sale and the knowledge of the buyer and seller. During the due diligence phase, the buyer looks deeper into the day-to-day aspects of the business and asks the seller to make representations and warranties about the business being purchased. The seller must decide what he is or is not willing to represent or warranty. If there is no representation or warranty, the due diligence requirement for the buyer increases. As the saying goes, let the buyer beware .
Rarely is the purchase of a business a cash transaction. Typically, there is financing from a bank, the seller or another person. The risk to the seller increases when the seller is providing financing. Properly protecting a seller in a seller-financed purchase can be especially difficult.
Closing is the process by which the buyer takes over the day-to-day operations of the business and the seller receives compensation. Compensation is usually cash. However, compensation can take many forms. Cash, stock, stock options, wages over time and other assets in the form of a nontaxable, like-kind exchange are just a few of the examples of compensation.
While the closing represents the end of the purchase and sale transaction, it is seldom the end of the process. The purchase and sale agreement usually contains representations, warranties, contingencies and non-compete clauses. Depending on the duration of these other items, it can be several years before the seller is completely finished with the sale.
