The buying and selling businesses is best described as a winding road of give and take.
Notably, anyone selling a business may be subject to state and federal securities laws. Ownership interests in many small businesses, just like Apple or General Motors, are considered securities. Thus, before even beginning to discuss bringing on another business partner or buying or selling a business, it is advisable to consult with an attorney who can ensure that even exploring a sale or purchase transaction will not be considered the solicitation or sale of securities, for which licenses are required.
Once securities laws concerns are addressed, buyers and sellers typically conference to brainstorm ideas. These initial conversations deal with the scope of what is being bought and sold as well as a ballpark idea of the price that would be paid for what is being bought and sold. In this context, buyers and sellers understand that they are not formally bound until a deal is agreed upon in writing.
True businesspeople understand that initial brainstorming conversations are preliminary and non-binding. Those who “think” that they are smart may try to artificially push the pace of the conversation and or trick the other party into considering something outrageous and then try to argue that the other party is bound by those exploratory statements. This is where it becomes evident who is a legitimate businessperson and who is not sophisticated enough to handle a transaction of this magnitude.
Once the buyer and the seller agree on basic terms like price and what is generally included in the transaction, the buyer and seller are said to “shake hands” on the deal. There is an understanding at this juncture that there is an agreement to try to agree, but that the deal may still not happen if various, still yet unnegotiated items are not agreed upon.
Then, following the “handshake agreement”, the buyer and seller involve their advisors — attorneys, accountants etc. — in ensuring that all aspects and details of the contemplated sale or purchase are considered. Some questions raised at this point in the process deal with more finite aspects of a business transaction, like:
Who receives the accounts receivable?;
Are there any subscriptions or contracts that have deposits that should be repaid to the seller?;
Are there potentially any environmental issues?; and
How realistic is financing under the terms of the handshake agreement?
Then, the Seller and the Buyer together usually prepare, with mutual give-and-take, a written agreement. The written agreement will identify a time period during which the buyer and the seller can confirm the character, quality and legitimacy of the items being sold or bought.
This time period is usually called “due diligence”. This is when a formal appraisal is done and when any title examinations of real estate take place. The failure of certain aspects of the business to meet expectations means that the actual “deal” could still be derailed.
Upon the completion of due diligence, there is typically a “closing”, which is the time and place when the money is exchanged for the property or business.
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 [email protected] 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.