Penny Wise yet Pound Foolish – Mistakes Business Sellers Make

Nothing scares a business owner more than an error or omission in closing documents. The best way to avoid big legal problems is to work with a team you can trust and that has a lot of experience. If not, it’s easy to miss important steps or make legal errors.

There are a lot of moving parts when you’re selling a business, which means there are a lot of ways for things to go wrong. It’s best to always be prepared with experienced advisors at your side. When mistakes happen, they can take up a lot of your time and cost you a lot of money. These kinds of problems can also stop your sales process dead in its tracks and even throw your deal off track. Remember it’s not just about the amount of money your advisor is able to negotiate for your business – it’s what you get to keep.

A savvy buyer might suggest the seller can decide the purchase price if they can decide the terms.  In this hypothetical scenario the seller might choose $1,000,000 as the purchase price and the buyer set the terms at $1 per year.

When business owners are in the process of selling their business it’s a materially large value transaction.  Those that think they will come out ahead by not paying advisory fees are making the worst business decision of their career. Business brokers, loan packagers, transaction attorneys and tax advisors earn their fees many times over while taking the risk – and stress off of you allowing you to focus on operating the business until closing. When selling a business, there is a lot of paperwork, which is no surprise. Your lawyer will help you make sure that you have done everything you need to do from a legal point of view. Your loan packager will make sure your buyer is approved with attractive terms.  Your tax advisor will insure you get to keep as much of the sales proceeds as possible. When your potential buyer sees that there is a solid team in place and all of your documents are in order he or she will feel more confident in the transaction and level of professionalism. This minimizes the risk of the transaction falling apart and expedites the process.

The Letter of Intent is a document that is often skipped (LOI). When an LOI is used it becomes the backbone of the definitive agreement so it’s production should be done by an experienced attorney. Occasionally it makes sense to skip the LOI and advance directly to a definitive purchase agreement.  In those cases the parties should still have an understanding of the significant terms and conditions.  This is sometimes referred to as a term sheet and can be as simple as an email. Some sellers think that if they skip the LOI stage, things will go more quickly or that they will save money. Remember that the LOI is an important part of almost every deal. After all, it not only puts in writing what both sides expect, but it also looks out for everyone’s best interests. Even though usually non-binding when buyers sign this document, it shows that they are serious about the transaction and that everyone involved in the transaction agrees on the major deal points which usually include:

  • Transaction Structure (Asset/Stock)
  • Purchase Price
  • Closing Date
  • Transition Assistance
  • Included/Excluded Assets
  • Non-compete Terms
  • Details of any Contingent or Seller Financing
  • Confidentiality Clause
  • No Shop Provision Terms

What if the whole deal falls through? Will your buyer then tell others that your business was for sale and even what terms were being discussed? This could happen if you didn’t have an NDA to protect you.  Your business broker or M&A advisor will know a lot about NDAs and be able refer a qualified business transaction attorney to draft or review.

Having an experienced team of professionals you can turn to for advice is a great way to avoid problems that could cost you time, money or even the entire transaction. Your business broker or M&A advisor, accountant,loan packager and lawyer should all be on this team and it’s ideal if they have worked together many times before such as ENLIGN Business Brokers, Marzella Law Group and Diamond Financial have.

Copyright: ENLIGN Business Broker, Inc.

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