Avoid a lawsuit
How to avoid a lawsuit when selling a business?
Selling a business comes with many emotions. The fear of letting go of something that’s been nurtured and cared for like a child, being grateful for the success and financial rewards the business was able to generate, the place or opportunity where so much time was spent and more.
The seller of the business knows and understands the ups and downs of owning a business. To place it in the hands of a new owner and hope they are successful is the equal of any previous decisions made by the owner. To make sure the new owner is set up for success and the seller is not left with dealing with legal problems, here are some suggestions.
The golden rule when selling a business is disclose, disclose, disclose. A business is part of the local, regional, national and/or global economy which is in constant motion with new laws, changes in tastes, competition and more. A successful business owner is always making decisions to change or tweak something. A buyer of the business has the responsibility of conducting their own due diligence and this means expecting good answers and accurate information for all the requests they make. As part of my process when selling a business I require the seller to provide the buyer with a disclosure statement. The purpose of the disclosure statement is not to cover every buyer question but touch on the main areas of the business and may lead to additional questions to help the buyer. Probably the number one area that can trigger a problem for the seller is not disclosing a piece of information. Whether this key piece of information turns out to reduce the chances of the buyer succeeding may be arguable, but if the buyer does fail there first place to look will be the seller.
Owning and operating a business comes with risk. Managing that risk can be the difference between success and failure. For a business to operate successfully it requires the expertise of more than just one person. A successful business owner will normally have a good relationship with a business attorney, a CPA for taxes and book-keeping advice, personal financial planner for investing business profits and more. A successful business buyer should have these same experts and should not look to the seller of the business for their advice. It is important that the seller answers all questions but does not put himself into becoming the professional advisor for the buyer to try to help the buyer save a little money.
Selling a business is not a quick process. When a seller therefore gets a genuine buyer inquiry and they are naturally anxious to sell, their inclination is to share as much information with the buyer as soon as possible so the buyer can make a decision. However, not all buyers are business owners. A lot of business buyers are simply looking to satisfy an idea they have that owning a business would be great. A genuine buyer should ask lots of questions. Equally, the seller should also be asking a large number of questions about the buyer to make sure they will be a good fit and wish to buy the business not just feed some romantic dream they may have of one day owning and operating a business. If the buyer seems a dreamer, walk away and look for another buyer.
A business is part of a complex world. When a motivated seller comes together with a motivated buyer a lot of focus is on the purchase price. The purchase price however is nowhere near as important as the terms of the deal. To make the deal palatable to both sides there is a need to be reasonable and meet somewhere in the middle. Just as important is not to make the deal too complex or it will easily lead to litigation. The bottom line is to keep it simple.
A buyer with good advisors will wish to look at a full set of financial statements and records as soon as possible. This list of documents can be extensive including Profit and Loss Statements, tax returns, bank statements, credit card receipt statements, payroll statements, sales tax statements and more. If these financial records are either not available or not in good shape then it will be a very difficult business to sell.
Selling a business is a formal process. The golden rule is to disclose, disclose, disclose and have good written records available to support any representations the seller makes. It is critical these documents not be disclosed too early in the negotiations but at the right time but that’s a topic for discussion another time.
Are you thinking about selling your business and move to your next challenge? Would you like to know the value of your business? If you would like more information please visit my website Business valuation.
For more immediate help you are welcome to send an email to Andrew Rogerson or give me a call on 916 570-2674.