Summit Law Blog

In this post, we'll discuss five issues you'll want to figure out before moving forward with a sale of your closely-held business. Deciding to sell your company is a major transition, and while the prospect of a successful exit is exciting, it's important to approach the process with a clear strategy and defensible positions. 

#1: Value of the Company

Ideally, you should have a current business valuation conducted by a valuation professional with experience in your industry. However, if you choose not to obtain an official valuation, it is still important to enter negotiations with a well-informed estimate based on your company’s financial performance, industry trends, and current market conditions.

• A clear, accurate picture of the business’s earning potential will strengthen your position and keep you from unintentionally starting negotiations at the wrong price point.
• Timing can also significantly impact the value. If you have had a year of irregular sales or one-time disruptions, you will want to establish clear supporting documentation to exclude that period from your financial analysis.
• The amount of seller financing you provide to the buyer can also influence the sale price. Which is to say, if you agree to act as the “bank” for part or the entire purchase price, the overall sale price is typically increased to reflect the added flexibility and risk you are taking on.

#2: The Buyer

The sale structure and level of protections in place for you as the seller should be tailored depending on whether you are selling to someone you already have a relationship with or to an unrelated third party. If you are working with someone familiar, seller financing may feel more comfortable, but it is still important to clearly define the repayment terms and establish proper protections against nonpayment.

• If the buyer is a third party, you’ll want to know how they plan to finance the purchase, whether through bank financing, personal capital, or a combination of both, and you’ll want to make sure that any financing contingency they obtain via the deal documents does not leave you with too much exposure.
• Finally, take steps to protect yourself from post-sale liability. For instance, if you must remain a guarantor on a lease or loan, the buyer should personally indemnify you against any related obligations after closing, and/or provide additional collateral.

#3: Seller Oversight Rights

After the sale, the buyer may want you to remain involved for a period of time to help ensure a smooth transition. This arrangement can be especially helpful if the buyer is new to the business and needs time to learn how to manage operations effectively. You may even want to stay longer to support marketing efforts, maintain customer relationships, or provide ongoing expertise.

• Regardless of the reasoning, it is important to decide what scope and duration of involvement you are willing to provide.
• Additionally, if you are the buyer’s financing source (as discussed above), you may also want to negotiate the right to reclaim the business’ equity in the event the buyer mismanages the business and falls behind on payments. This can offer a layer of protection and help safeguard the company’s long-term stability, but should only be considered as an option if you are willing to postpone your retirement or other post-sale plans.

#4: Resolve Existing Ownership

If your business has multiple owners and you haven’t kept your governing documents updated, or you have promised sale proceeds to employees, service providers, or former business partners, you’ll need to reach a clear agreement on how the sale proceeds will be divided prior to commencing negotiations with a buyer.

• Overlooking this step can lead to misunderstandings or disputes that may delay the sale or lead to litigation. Addressing these expectations up front can help prevent surprises or last-minute issues at closing that can cause a sale to unravel.

#5 Structure of the Deal

Another key decision is whether you are selling the company’s equity or its assets. An equity sale typically means the buyer acquires the entire business, including its contracts, obligations, and both known and unknown liabilities.

• This structure is generally more favorable to the seller, and it also allows for a cleaner and more straightforward transfer of ownership.
• In contrast, buyers often prefer asset sales because they can choose specific assets to acquire while avoiding unwanted liabilities.

Bonus Tip: LOIs

Don’t sign a letter of interest (“LOI”) without having legal counsel review it – even if the LOI is nonbinding, as most should be. Parties can inadvertently give away many rights via the LOI that are very difficult to regain once an agreement has been signed. Conversely, if you are properly represented during LOI negotiations, your counsel can reach agreement on major items that will not need to be re-traded in the definitive deal documents, thus saving legal fees. Negotiating major issues in a 2-5 page document (the LOI) is far more cost-efficient than negotiating them in a 20+-page document (the purchase agreement).

And with that – happy selling! Reach out to Ada Danelo at adad@summitlaw.com with any questions.