In this article...
This article discusses topics to keep in mind when buying and selling businesses, including: Business Brokers; Letter of Intent (LOI); Preparation of the Organizational Documents for the Company; Preparation of the Company's Financial Information; Business Valuation; Intellectual Property Rights (IP); Noncompete Agreements; and Transition Services for Sellers
This article discusses topics to keep in mind when buying and selling businesses, including:
- Business Brokers;
- Letter of Intent (LOI);
- Preparation of the Organizational Documents for the Company;
- Preparation of the Company's Financial Information;
- Business Valuation;
- Intellectual Property Rights (IP);
- Noncompete Agreements; and
- Transition Services for Sellers
Company brokers or brokerage companies that sell businesses may or may not be involved in the advertising and negotiation of the company's sale. In other words, a business owner selling a business does not have to hire a business broker because they can market and negotiate the deal on their own, with the help of their team of professionals. Business brokers primarily bind buyers and sellers, and once the acquisition process begins, they typically take a step back and let the parties' professional advisors complete the transaction. The commission paid to the business broker is usually a percentage of the overall purchase price, ranging from 10% to 15%. Broker fees are negotiable, and before signing any broker contract, the seller should consult with a business attorney.
Letter of Intent (LOI)
Either or both parties may want a more concrete interpretation of the terms of the proposed acquisition's sale at some point during the early stages of the acquisition. A seller would want to know whether the buyer has an appropriate selling price and transaction structure in mind, and will be hesitant to reveal its trade secrets before a letter of intent is signed and executed. The letter of intent is generally a more formal document that all parties must sign. As a result, it's important to draft the letter of intent with care and precision in order to prevent problems where the parties' shared understanding of the contract isn't matched.
Preparation of the Organizational Documents for the Company
Most companies, whether they are formed as a limited liability company or a corporation, should already have the requisite Illinois business organization documents in place, which represent how the company's internal activities and affairs are run and structured. However, some companies, especially small businesses, may have neglected to keep track of their organizational records over time. The corporate agreement, bylaws, shareholder agreement, articles of organization, articles of incorporation, sales agreements, customer agreements, and other organizational documents should all be revised to reflect the company's current internal activities and relations. Prior to starting the acquisition process, the business owner can consult with a corporate lawyer to ensure that the company's house is in order. This is often overlooked, but it can be costly if it causes the agreement to be delayed or even terminated because the organizational records were not in order.
Preparation of the Company's Financial Information
Profit and loss statements, bank statements, tax returns, commercial leases, consumer or client contracts, manufacturer and supplier contracts, and other business financial records are likely to be requested by a prospective buyer for a period of up to five years. The prospective buyer may request these business documents during the early stages of the transaction, so it is important that they are well written and do not contain any false claims. If this is achieved, the potential customer may be more likely be assured that they are dealing with a well-run company.
After deciding to sell a company, the next step is to figure out how much it should cost to buy it. There are numerous variables that can influence the purchase price. A business would sell for the price that a prospective customer is willing to pay for it at the end of the day. Business attorneys, on the whole, lack the training and expertise necessary to serve as the client's main valuation counsel. However, a company may be valued in a variety of ways. 1) The income approach, 2) the asset-based approach, and 3) the business approach are the three most popular approaches. Regardless of the method used to value the property, the seller must know not only what price they are willing to accept, but also what variety of offers they may expect. As a result, the seller must pose the same question that a potential buyer would: how much is the company really worth? A business, like a piece of real estate, is worth whatever an informed, willing buyer is willing to pay. However, it's critical to differentiate between the seller's willing to accept selling price and the valuation. Sometimes, these two figures do not match up exactly.
Intellectual Property Rights (IP)
Intellectual property is one of a business's most valuable assets. As a result, it is important that the buyer perform rigorous due diligence on the target business' intellectual property during the preliminary planning stages of the acquisition. Copyright, patents, trademarks, trade secrets, licenses, and domain names are all examples of intellectual property rights.
A noncompete clause and other restrictive covenants are often used in transaction agreements for prospective buyers. These restrictive covenants, especially the noncompete clause, must be thoroughly scrutinized. Generally, a prospective buyer may want to keep the seller from competing with the purchasing company for 3-5 years in a certain geographic territory, typically a radius of which the business currently operates and where it could naturally grow. If the seller would be prohibited from participating in any business that is competitive with the purchasing company, an additional monetary amount should be given to them in exchange.
Transition Services for Sellers
It's important for the seller to decide whether they'll be able to provide post-closing transition services during the early stages of the acquisition. Since the seller knows the personal details of the business' clients and activities better than anybody, the prospective buyer may want the seller to offer such consultancy services after the transaction has been completed. The seller's transition services could be offered for free, or the purchasing company could recruit the seller as an employee or independent contractor for a set period of time. It is not unusual for a prospective buyer to pay additional compensation for the seller's transfer services over and above the target purchase price.
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