Selling a Business? Properly Document The Sale To Avoid Costly Errors
It is very common for a business owner to try to sell their business by themselves and end up making costly errors along the way. Using incorrect documentation (or no documents at all) or some other form of miscommunication is actually a frequent mistake made by business owners who attempt to complete a deal themselves. Selling a small business is an exercise that is best left to professionals that can properly assist you such as an attorney or business broker.
This article examines some common documentation mistakes that have been encountered by business owners when trying to sell their business.
Document Who is Selling The Business
It must be made clear from the outset on who is the authorized vendor of the business. A common mistake is that the "shareholder" of an asset sale is listed to be the vendor when it might actually be the legal corporate entity. Also, if it is partnership, sole proprietorship or other form of business organization, this must be properly documented on the agreement.
Document What is Being Sold
This is a critical point that must be articulated as it can lead to major confusion and be a potential deal breaker. A common source of confusion is the difference between an "asset sale" versus a "share sale". There is a tremendous difference between the two so as the seller, you should be clear on what is being listed for sale. Briefly though, a share sale refers to the sale of the actual share in the corporation and (usually) includes everything the corporation owners as well as its liabilities, working capital and even past legal obligations and contracts. There are major differences with respect to legal recourse and taxation impact so please talk to your lawyer and accountant to understand the best course of action for you and how best to document a purchase agreement.
Be Clear on Properly Listing the Assets Included in the Selling Price
For any assets or equipment included in the sale you should clearly specify in the form of a list. The asset list should be clear with detailed descriptions of what is being included such as serial numbers, product identification and even what condition the equipment is in.
Expectations From Due Diligence Activity
The buyer and seller should agree on what is being asked for in terms of the due diligence activity. A seller may have certain expectations that are not realistic for the buyer. For instance, a buyer may ask for the past 10 years of financial statements and tax returns on the business whereas the seller may only be comfortable providing 4 years of information.
Be Clear on the Post-Sale Activity
If a buyer expects that a seller to remain with the business after the sale then the activities expected from them should be clear to both parties. Instead of just specifying 'training' in an agreement to purchase, there should be clarity added. For instance, it should be understood the hours of training that are expected, activities such as introducing the buyer to the customers of the business, assistance with general operations and so on.
There are many more deal points to consider that should be properly documented in an agreement. An experienced business broker can assist you with structuring a deal properly. Before you agree to any deal though you should have your lawyer refer it first though so that proper documents and deal language are used.
This article examines some common documentation mistakes that have been encountered by business owners when trying to sell their business.
Document Who is Selling The Business
It must be made clear from the outset on who is the authorized vendor of the business. A common mistake is that the "shareholder" of an asset sale is listed to be the vendor when it might actually be the legal corporate entity. Also, if it is partnership, sole proprietorship or other form of business organization, this must be properly documented on the agreement.
Document What is Being Sold
This is a critical point that must be articulated as it can lead to major confusion and be a potential deal breaker. A common source of confusion is the difference between an "asset sale" versus a "share sale". There is a tremendous difference between the two so as the seller, you should be clear on what is being listed for sale. Briefly though, a share sale refers to the sale of the actual share in the corporation and (usually) includes everything the corporation owners as well as its liabilities, working capital and even past legal obligations and contracts. There are major differences with respect to legal recourse and taxation impact so please talk to your lawyer and accountant to understand the best course of action for you and how best to document a purchase agreement.
Be Clear on Properly Listing the Assets Included in the Selling Price
For any assets or equipment included in the sale you should clearly specify in the form of a list. The asset list should be clear with detailed descriptions of what is being included such as serial numbers, product identification and even what condition the equipment is in.
Expectations From Due Diligence Activity
The buyer and seller should agree on what is being asked for in terms of the due diligence activity. A seller may have certain expectations that are not realistic for the buyer. For instance, a buyer may ask for the past 10 years of financial statements and tax returns on the business whereas the seller may only be comfortable providing 4 years of information.
Be Clear on the Post-Sale Activity
If a buyer expects that a seller to remain with the business after the sale then the activities expected from them should be clear to both parties. Instead of just specifying 'training' in an agreement to purchase, there should be clarity added. For instance, it should be understood the hours of training that are expected, activities such as introducing the buyer to the customers of the business, assistance with general operations and so on.
There are many more deal points to consider that should be properly documented in an agreement. An experienced business broker can assist you with structuring a deal properly. Before you agree to any deal though you should have your lawyer refer it first though so that proper documents and deal language are used.
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