Like almost anything, the more practice someone has at doing something, the easier it is to replicate that experience the next time. However, most people either sell or buy a business only a few times in life, if at all. The process of buying or selling a business typically breaks out into five major steps and considerations. Steps one and step two can occur in either sequence.
First, the seller and the buyer need to reach an agreement in principle. This means that the seller and the buyer generally agree that they want a transfer of business ownership sometime in the future along with a rough idea of approximately how much money will change hands and what aspects of the business will be included in the transaction. I often refer to this as the “handshake agreement.”
The buyer and seller know that there are lots of gaps to be filled, but they have a commitment to try to reach agreeable terms. Sometimes, there are contingencies, too. For instance, a buyer may condition the purchase on financing or sales records. The seller may condition the sale on future employment for the seller with the new buyer.
Second, the seller and the buyer secure third-party professionals to assist them. For very small businesses such as from-home retail businesses (Avon, Watkins or some supplement companies, for example), the third-party professionals may be the “agent contact people” at the company headquarters.
In most instances, though, appropriate third-party professionals include at least an attorney, accountant and insurance agent. In some instances, one attorney or accountant can help the seller and buyer. But, in some instances, those professions’ ethics rules prohibit dual representation. Nevertheless, those professionals themselves will be able to (and are required to) recognize and advise if there is a conflict of interest that precludes representation of both the buyer and the seller.
Third, a purchase agreement is prepared, often largely driven by the attorneys, with direction and input from the seller, buyer, insurance agents and accountants. The purchase agreement is the written version of the handshake agreement. A complete writing is essential because businesses have so many aspects to consider, and verbal agreements almost always lead to (usually) unintentional misunderstandings later. The purchase agreement needs to consider all aspects of the transaction, including but not limited to inventory, accounts receivable, accounts payable and exactly what business liabilities are assumed by the buyer.
Fourth, the seller and the buyer need to invest the time to ensure that the presumptions that were used in the handshake agreement and the purchase agreement are accurate. During this time, the contingencies are typically satisfied, as the buyer gets approval for financing, and the seller confirms the buyer’s post-transaction expectations.
Fifth, there is a closing. This is where the documents officially changing ownership of the property, goodwill, contracts and relationships of the business are signed. The closing does not usually need to be contemporaneous with the moment that ownership will change.
Most business ownership transitions can take at least several months or a year.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at Lee@LeeSchroeder.com or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.