Acceptance and Transfer
Once you've located a buyer for your company and come to an agreement as to the major terms and price, you are ready to move into the process of actually closing the deal.
The major steps involved in the Acceptance of the Offer and Transfer of Ownership of a business are:
Letter of Intent
Once an owner has a general agreement with the buyer as to the price and terms of the sale of their business, the buyer usually drafts and signs a non-binding letter of intent. The letter of intent lays out the general terms of the deal, and, if signed by the seller, it indicates that both parties intend to move forward in completing the transaction. Generally, at the time the buyer submits the letter he or she will also make a monetary deposit on the purchase price, similar to the earnest money used in a real estate deal. If the deposit is large, the seller may agree to a "no-shop" agreement, which prevents the seller from further marketing the company. However, the letter is usually nonbinding in the sense that at any point negotiations can be broken off by either party, and the buyer's deposit will be returned.
Once signed and accepted by the seller, the Letter can be shown to third parties such as lenders and stockholders as evidence of the seriousness of the parties. The buyer will begin a thorough investigation of all aspects of the company (known as "due diligence"), and the letter should give the buyer permission to contact the owners lawyer, accountant, banker, etc., to find out more about their operation. In the meantime, the buyer and owner’s respective lawyers can begin to hash out the contractual language of the purchase agreement.
There is one part of the letter of intent that should be binding on the purchaser, and that is the section in which the buyer promises to keep confidential the fact that negotiations are proceeding, and also promises not to disclose any information learned during the investigation or negotiations. This provides the owner with some protection if the deal falls through. However, it is recommended that the owner not rely solely on this agreement — it's still a good idea to keep the most sensitive trade secrets or other information withheld until the owner is sure that the buyer will sign the contract.
Multiple letters of intent. Sometimes, business intermediaries will conduct a controlled auction in which they will describe the seller's company to a number of likely purchasers. They will solicit bids in the form of letters of intent, to be presented to the seller on a specified date. In this situation the owner may receive several letters of intent, without having done any significant negotiations with the buyers. The owner will need to work with their intermediary to find out as much as they can about the potential buyers and then choose one of the letters to accept. In these situations, buyers generally make their best offer the first time, so it's usually best for the owner to accept one, without attempting to continue to pit buyers against each other or expecting them to make additional offers and counteroffers.
Is a letter needed? The letter of intent stage can be skipped if an owner knows the purchaser well (for example, the buyer is your child or a key employee), or if the deal is a very small one and it looks as if you can move directly on to negotiating the purchase agreement. However, even if the owner and the buyer decide to dispense with the formal letter, it would still be recommended that the owner have the buyer sign a confidentiality agreement before moving on to thorough Due diligence.
Due Diligence
Usually, after a buyer signs a letter of intent to purchase a business and the seller accepts the letter, the buyer will have a specified period of time in which to conduct a due diligence investigation of the seller and the company. During this period, the buyer should have access to the owner’s financial and other records, facilities, employees, etc., to investigate before finalizing the deal.
Ideally, the owner will have collected and examined most of the information the buyer wants, as the owner prepared the company for sale. The vast majority of it is in the form of paper. The buyer will want to see copies of all leases, contracts, and loan agreements in addition to copious financial records and statements. He or she will want to see any management reports the owner uses, such as sales reports, inventory records, detailed lists of assets, facility maintenance records, aged receivables and payables reports, employee organization charts, payroll and benefits records, customer records, and marketing materials. The buyer will want to know about any pending litigation, tax audits, or insurance disputes. Depending on the nature of the business, the owner might also consider getting an environmental audit and an insurance checkup.
If the owners financials were un-audited, and especially if they were prepared in-house, the buyer may want the owner to pay for updated statements by an accountant of his or her choosing, as a condition of closing the sale. The buyer will then perform an independent financial analysis of the company; for example, the buyer may look at the key financial ratios and examine the trends over time, compare them to industry averages, create projected statements for the business using his or her own assumptions, etc.
A wise buyer will also want to take a look at the facilities, and spend some time "in the trenches" with the owner and/or the employees as they go about their business. It is suggested that the owner accommodate this request, even if it will cause some disruption of the normal operations. Buyers will be most suspicious if they think the owner is hiding something. They tend to be more concerned about what they don't know, than they are concerned about minor or even major problems that might turn up in an investigation. If the owner knows that certain problems exist, they’re much better off disclosing them and talking about possible solutions, rather than shoving them under the rug.
Buyers will also look the environment the business operates in, including the size and makeup of the market, the principal suppliers and customers, the owner’s competition, and the industry. They may ask for more and more information until the owner might feel overwhelmed! It is suggested that the owner respond patiently, and cooperate as much as they reasonably can. The owner should just keep their mind on the goal — selling the company at a price and terms the owner can live with — and the owner will get through this potentially very trying period.
Owner’s due diligence. The owner should also do some serious investigating of their own. They'll want to find out the buyer's credit record, management experience, reputation, and the plans he or she has for the company's future operation. This is particularly true if the owner plans to continue an employment or consulting arrangement with the buyer after the sale, or if some part of the purchase price will be paid into the future though a financing arrangement, or an earnout. However, even if they plan to collect all the cash at the closing, walk away, and never look back, an owner should satisfy themselves that there's at least a reasonable likelihood that the buyer will be able to operate the business successfully. If he or she fails miserably, there's a stronger likelihood that the owner may be sued for fraudulently misrepresenting the business's financial state, assets, products, or any other straws the buyer can grasp at.
Business Purchase Agreement
The purchase agreement for the business is one of the most important legaldocuments the owner will ever sign. After all, many years of hard work will culminate in this single transaction, by which the owner has put a dollar sign on the value of the entire operation. The owner won't want to have problems collecting the money due or to have legal problems haunting them into the future, and a carefully constructed purchase agreement can be the best insurance policy for preventing such catastrophes.
Customarily, the buyer's lawyer provides the initial draft of the purchase agreement for a business. This makes sense, since the buyer has to live and work with the company while the owner will walk away into the sunset with the cash (theoretically, at least). However, we suggest that the owner’s lawyer should draft the sections that are most important to them. In most cases, that means the clauses containing representations and warranties about the business. Ideally, the owner should try to avoid or limit the making of any warranties or guarantees for which they can be held legally accountable. The owner may also negotiate closely with the buyer as to which liabilities he or she is assuming, and which will remain with the owner. Here's where a top-notch lawyer can really save the owners skin. The owner must make sure that they maintain ongoing liability insurance for any liabilities that will remain with the — for example, product liability insurance on products that were sold during their tenure as owner.
Indemnity provisions, in which the owner promises that they will reimburse the buyer for certain types of expenses if they occur, are often a hotly disputed area of the contract. If the owner agrees to any indemnifications, they must make sure there's a time limit such as two years on the buyer's claims, and a dollar limit such as 20 to 25 percent of the business purchase price. Depending on the value of the business, they should also insist on a dollar-limit floor for claims, so that the buyer doesn't nickel and dime them to death with lots of small problems.
If the owner is selling the assets of their business, as opposed to the stock, they'll need to allocate the purchase price among the assets for tax reasons. The allocation should be part of the purchase agreement so there's no dispute about it later. The allocation will also have to be reported to the IRS on Form 8594, Asset Acquisition Statement.
The purchase agreement is likely to be a lengthy, complicated document. For some of the more elaborate deals, the contract plus attachments can run into the hundreds of pages. The owner should go through it carefully with their attorney and make sure that they understand the implications of whatever is in there.
Once both parties have agreed on the language of the purchase agreement, it will be signed by both parties. The contract will state the date at which the final transfer of ownership and possession of the business will occur, and when the seller will get the money. With a signed purchase agreement in hand, the buyer can finalize any financing arrangements with outside lenders in anticipation of the closing.
State Laws on Business Sales
State laws can impose a variety of obligations on both the seller and buyer of a business. The purpose here is to alert the owner to some of the implications of the most common requirements. For more detailed information on the requirements in a state, consult an attorney in that state or who is authorized to practice law in that state.
Bulk sales acts. Many states have laws on their books requiring that when a business sells the "bulk" of its materials, supplies, merchandise, or other inventory outside the regular course of business, it must formally notify all of its creditors at least 10 days before the pending sale. Otherwise, the sale will be ineffective against those creditors, meaning that they can still repossess the goods from the new owner, in repayment of the debt. In some states the creditors will also have a lien on the proceeds of the sale. Even if the business doesn't have inventory, it may be covered by the law because a number of states have extended it to apply to certain service businesses, most commonly gas stations, restaurants, and bars.
The purpose of the law is to give creditors a chance to try to collect anything owed them before the owner packs up and leaves town. After all, the creditors know nothing about the buyer, and might or might not have extended credit to him, if they did know. The notification process can be quite cumbersome if there are a lot of creditors, although some states permit printing a notice in a general circulation newspaper as an alternative. Another drawback to the law is that the owner may prefer that news about the impending sale be restricted until it actually happens. The state laws generally allow the notification requirements to be waived if both parties agree, but then the buyer will want the owner to agree to indemnify him or her against any claims made by their creditors.
Another part of the bulk sales acts requires the owner to give the buyer a list of all known creditors, their business addresses, and the total amounts owed to them. The list must also be filed with the appropriate state agency, so that creditors have access to it.
Recorded security interests. Before the buyer closes the deal, he or she will want to be sure there are no recorded liens or other security interests (known to lawyers as UCC-1 filings) against any of the assets. Therefore, the buyer's lawyer will order a search, much like a title search for real property, through the appropriate state, county or other records. Once the deal goes through, the owner in turn will need to have their lawyer record any security interests they will have in the buyer's business or in particular assets such as his or her home or other property.
State tax certificates. In some states, the owner must obtain a certificate from the appropriate tax authorities showing that no taxes are currently owed, and provide this to the buyer. The most common taxes covered are sales and use taxes due on sales to customers, and unemployment insurance taxes due on employees' payroll. If the owner owes any taxes, the buyer may be required to hold back enough of the purchase price to cover the bill, and to remit it directly to the state tax authorities.
State sales or transfer taxes. In some states, the sale of a business or its assets can itself be subject to sales tax. Other states tax the sale of stock or other securities. The tax is not usually significant enough to sway your decision to sell stock or assets if incorporated; nevertheless, an owner will want to know what the tax liability will be for planning purposes.
Directors' and shareholders' approval. For businesses organized as corporations, state laws and their own corporate charter may require that their Board of Directors must approve the transaction. In some situations the stockholders must also vote. This is most commonly necessary for sales of the business's assets (rather than stock) and for tax-free mergers and reorganizations. A vote of the buyer's Board of Directors and stockholders may also be necessary. Where the deal is structured as a stock sale, however, shareholder approval is not usually required.
Minority shareholders' rights. If a business has any shareholders who are not pleased about the deal, the state law may give them certain protections. In many states, minority shareholders have the right to an independent appraisal of the business, and have the right to be cashed out based on the appraisal at the time of the sale. In addition to state laws, an owner’s corporation may have buy-sell agreements in place that must be honored.