Purchasing or Selling a Business

The Process of Buying or Selling a Small Business

Generally, the purchase or sale of an incorporated small business will be in the form of either:

  • an asset purchase, where the buyer purchases some or all of the seller’s assets. This transaction is often favored by buyers because you get the assets, like equipment and inventory, without taking on the seller’s debts and liabilities.
  • a stock purchase, where the buyer purchases all or most of the seller’s stock and “steps into the shoes” of the seller. Sellers often like this transaction because the buyer assumes all of the seller’s debts and liabilities.

Regardless of how the transaction is structured, the deal usually flows like this:

  • preliminary negotiations
  • drafting a formal agreement and pre-closing review
  • closing.

As early as possible in the process, it’s a good idea to consult a tax and financial adviser to help make sure that you get the deal you’re after. Minimizing taxes and potential liability issues are usually the major concerns for buyers and sellers figuring out how to structure a deal.

Minimizing taxes and potential liability issues are usually the major concerns for buyers and sellers figuring out how to structure a deal.

Preliminary Negotiations & Discussions

At this stage, the buyer does its investigation of the seller to determine the value of the business or assets it is buying. This usually involves an extensive review of the seller’s finances and assets so the buyer can make its own determination regarding value. How much due diligence the buyer does will depend in part on whether it’s a stock or an asset sale. More due diligence is required in a stock purchase since in addition to assets, the buyer is also taking on the seller’s debts and liabilities.

The parties should discuss and determine other matters at this time, including:

  •  if shareholder or board of directors’ approval is required
  • whether any government or other third-party documents are required (such as a certificate of good standing or title documents)
  • if any contracts require third-party approval before the buyer can take them over (like leases or loan agreements).

Other issues may come up at this stage like whether any key employees of the seller will be retained by the buyer and, if so, how that will be handled.
Parties often enter into a letter of intent during this time to show that they are serious about the deal. It helps to make sure that you don’t waste time and money performing due diligence and negotiating a formal agreement. These letters are non-binding in the sense that you usually can’t force one party to buy or sell based upon a letter of intent. Nevertheless, you can make parts of the letter enforceable and it’s usually a good idea to do so. Typically, the letter should contain:

  • how long the buyer and seller are willing to keep the deal open
  • a binding promise by the purchaser regarding confidentiality of the seller’s trade secrets, like customer lists and other sensitive company information
  • a binding promise by the seller not to negotiate a sale with any other prospective purchaser for a certain period of time.

Formal Agreement & Pre-Closing

A formal, final agreement is the culmination of the negotiations. It contains all the details of the deal: the price, the terms of the deal, when the business or assets will be turned over, whether they will be held by an escrow agent, and other important items. Usually, the agreement goes through many drafts and is finalized for the pre-closing and then signed at the closing.

At the pre-closing, there are many details to attend to. Both the seller and the buyer will want to make sure that all the proper documentation is in place to finalize the deal at the closing. Again, the extent and type of documentation will depend on whether it’s a stock or an asset sale.

Closing

Closing is when the deal is completed. It’s a paper-intensive process. At this time, you’ll want to make sure:

  • all documents are signed and notarized if required (such as deeds and lease assignments)
  • the sales proceeds are disbursed properly in accordance with the terms of the agreement
  • to record documents such as deeds and certificates of title to motor vehicles and other equipment or property.