How to Protect Yourself When Selling Your Business
You’ve built your company from the ground up and have successfully led it through the ups and downs over the years. Now, you’re ready to do something different, whether that’s trying a new industry, pursuing another passion, or retiring. You want to sell your business so a new owner can carry on its legacy.
You want to approach your business’s sale with care and caution. Protecting your interests when selling a company makes the process smoother for all involved.
Ways to Protect Yourself When Selling a Business
The selling process can be an emotional time for business owners. Safeguarding your interests when selling a business means you’re more likely to keep your emotions in check and less likely to work with an uncooperative buyer.
Here’s how to protect yourself when selling a business.
1. Know Your Business’s Worth
You can’t tell if an offer is a good offer or not if you don’t know your business’s value. Overvaluing your business can lead you to reject solid offers from potential buyers. Undervaluing your company means you can end up accepting a low-ball offer.
Getting a business valuation can give you a realistic idea of what you can sell your company for. It also helps you separate the wheat from the chaff when offers start coming in. You can quickly sort out the offers that are way too low.
A trusted business broker can value your company for you. The broker will use sales data from companies similar to your own to calculate its value and give you an idea of a target sales price. The broker will also use your company’s financial status and situation when performing a valuation.
If your business gets a low valuation, you might want to work on improving its value before you sell it. For example, if you have a lot of debt, paying as much of it off as possible can help to increase your company’s worth.
Protecting your interests when selling a business means knowing how much your business is really worth.
2. Tap Into Expertise
Selling a business isn’t a do-it-yourself process. To protect your interests and ensure you’re getting the most from the deal, it’s worthwhile to tap into the expertise of others. If you don’t currently work with an accountant, consider hiring one to prepare your company’s financial statements. Buyers want to see how your business performs and whether it earns more than its spends every month.
Also, consider working with a broker when selling your company. A broker can help you get an accurate valuation for your business. A well-connected broker will be able to point you in the direction of quality, qualified buyers. They can also make arrangements for financing if needed and help you market the business.
Not every business broker is right to sell every business. You want a business broker that has experience selling companies in your industry and of similar size to your company.
It’s also good to hire an experienced lawyer to handle any contracts and ensure the process complies with local laws. A lawyer experienced in the business sale process will be more likely to keep your deal on track and avoid the risk of a deal falling apart at the last minute. A good business broker will work with the lawyer to keep the sale moving forward.
3. Protect your Confidentiality
When selling your business, you don’t want customers, employees, and competitors to know that your business is for sale. This could scare off some people from doing business with you if they are uncertain of the future direction of the company.
Therefore you want to use a third-party business broker that can protect the sale of your business by requiring all potential buyers to sign a confidentiality agreement before they find out what business is for sale. This means that the business will be advertised in general terms and not include the name or address of the company.
Experienced buyers understand that they will need to sign a confidentiality agreement and provide some information on their qualifications before receiving more information.
4. Get Proof of Funds
Ideally, the buyers that approach you about purchasing your business will be serious and — even more critical — able to pay for the sale. Even if a buyer seems trustworthy and reliable, it’s still crucial to ask for proof of funds before proceeding with the sale.
You don’t want to go through the due diligence process or reveal confidential details about your company only for the buyer to back out due to financing issues.
There are many ways to make asking for funds part of the process and not awkward. Instead of making buyers feel singled out, have the request built into the term sheet or letter of intent.
5. Know What is included in the sale price
A business can be different things to different people. For example, you might want to sell the company but not the property it’s on. Some business sales include the accounts receivable, and some don’t. You may be selling just the assets of a business, or you may sell the corporate stock. Or it’s possible you are only selling part of the company.
You must be clear on what’s for sale and what isn’t for sale. If you work with a broker, you need to ensure you’re on the same page about that. You don’t want to go into the sale thinking you’re going to retain the rights to a trademark only for the buyer to believe that’s what they’re buying.
When evaluating different offers, make sure your business broker has the expertise to explain what is included in the offer and what is not. You don’t want to just look at the offering price. For example, one offer may be for $5 Million, but the buyer wants you to include accounts receivables valued at $500,000 and working capital equal to $300,000. Another offer may be for $4.5Million, but the offer doesn’t come with accounts receivables and working capital. Everything else being equal, the $4.5Million offer is the better offer.
Experienced Business Brokers can educate you on what is included in the sale of your business for each specific offer.
One way to limit what you sell to only the essentials is to separate the assets you want to retain. You can set up a separate corporation to retain real estate and lease this back to the buyer of the business providing you with income going forward, or you may decide to sell the business and real estate together.
Knowing what is included in the sale will protect you from missing out on realizing the highest total value when selling your business.
6. Limit Claims
If a buyer experiences a loss after the sale of the business, they might have a right to an indemnification claim. For example, if you forgot to obtain a particular business permit before the sale, and the buyer ends up paying a fine, they could file a claim against you as the seller to recoup their loss.
Limiting claims helps protect you during and after the sale of your company. You can limit claims in several ways. You can specify the number of times a buyer can make a claim, limit the time frame they have for making claims or limit the dollar amount they can claim. Performing thorough due diligence before finalizing the sale will also help to limit lawsuits.
7. Disclose Everything
Disclosing everything about your business upfront, that is customary to disclose. Full disclosure means that a buyer can’t turn around at the end of the sale and say they weren’t aware of a particular issue. A business broker can provide you with what is typically disclosed to a potential buyer and when during the sale process.
One way to approach disclosure is to disclose as much as possible, even if you’re not sure it’s relevant. That includes items that might not come up during due diligence or are not revealed in your company’s financial statements.
Revealing as much as possible minimizes the risk of a lawsuit or indemnity claim down the line.
8. Selling a business to a competitor
When we talk about disclosing information to a buyer, you want to be more careful about protecting yourself when considering the sale of a business to your competitor. In this case, you want to wait to disclose some information until a purchase agreement is signed to make sure that their intentions are clear and they have put a down payment for the business in escrow with your attorney. You also wouldn’t want to provide them with access to your customers and employees until after a sale is complete. They will also have to wait until a deal is completed for proprietary inventions or sensitive intellectual property.
Sell Your Business With Synergy Business Brokers
There are many ways to protect your business interests when selling. Synergy Business Brokers is an award-winning business brokerage specializing in selling companies with values between $600,000 and $40 million. We work with companies in various industries, including technology, construction, transportation, distribution, healthcare, and manufacturing.
We use a 15-step sales process to help you sell your company quickly and for the highest possible price. We also work to ensure that your interests are protected throughout the process. If you’re ready to sell, schedule a consultation today.