Want To Sell Your Business? Here’s How To Close The Deal
Over the past couple of months, we’ve been taking a deep dive into the process of selling your business, ending with today’s post on how to close the deal. We’re pulling back the curtain on exactly how we at Southard Financial help you find a qualified buyer for the company you’ve built.
Since we’ve successfully helped dozens of small business owners walk through this undertaking, we realize it can easily become an overwhelming event. But with our 30+ years of experience on your side, we know how to help you get the best price and keep your sanity.
In Part One, we covered how to Get a Valuation.
In Part Two, we showed why you need a proven Marketing Plan.
(Take a minute and read those two articles before moving on to the final step: Closing the Deal.)
Steps to Closing the Deal
This is the point where you as the owner will most likely begin to see light at the end of the tunnel. Selling your business will begin to seem real as actual people begin taking an interest in what you have to offer.
Indications of Interest / Letters of Intent
At the end of the Marketing Phase (you read Part Two, right?), we usually end up with multiple initial Indications of Interest from serious buyers. Once the business owner has had a chance to review each of these, we arrange phone interviews and site visits with each of the potential buyers. Then we ask each of the interested buyers for final bids in the form of a letter of intent.
We then review each of the bids and make one of three recommendations regarding each buyer:
- Move forward – if the buyer and the price both look good
- Ask them to rebid – if they seem like a good candidate, but their price isn’t quite right
- Let them go – because the right price with the wrong buyer for the company is still a bad deal
Next, we secure a more formal Letter of Intent (LOI), which spells out in detail the terms of the agreement, the final price, and how the buyer plans to pay.
Buyers usually pay in one (or a combination) of several ways:
- Cash – most popular (and certainly most attractive) in today’s market
- Stock – the seller receives ownership in the acquiring company (vested interest in the ongoing success of the buyer); not really an option in private equity deals
- Earn-Out – the seller agrees to stay on and continue running the company, earning a percentage going forward…if company performance exceeds expectations
- Seller Note – typically not a large percentage of the total price and only over a certain number of years since there is risk involved if the buyer runs their new business into the ground
Once the seller chooses the winning candidate to purchase the business, we request a first draft of the Definitive Purchase Agreement. This is a legally binding contract between the buyer and the seller that fully spells out the terms and conditions for the transaction. Additionally, there may be various included agreements, such as:
- Escrow Agreement
- Terms of Employment Agreement (if the seller stays on with the company)
- Consulting Agreement
Both buyer and seller will include Reps and Warranties. They form the basis for due diligence and basically state that each party has been completely forthcoming and accurate in their representations of themselves and the business.
The presence of a legally binding agreement now means that lawyers are brought in to facilitate the rest of the sale. At this point, our role at Southard Financial becomes similar to that of a program manager (or, at times, a cat herder), making sure everyone has what they need to keep the transaction moving along.
Depending on the complexity of the deal and the demeanor of the personalities involved, the addition of legal teams may bog things down. To help avoid that, we usually recommend working with firms that have experience in Mergers and Acquisitions. However, we sometimes need to step in and apply help, shifting the momentum to one side or the other to close the deal.
Wrapping Up: Escrow and Indemnity
In today’s market, there is always some kind of holdback or escrow…usually a percentage of the total selling price that is held until the specified conditions of the contract are met and for a negotiated time period.
Indemnity insurance is common, and the buyer and seller often split the cost. That way, if something goes wrong (in spite of the extreme amounts of due diligence done to this point), the insurance company will handle it. While it isn’t inexpensive, it does eliminate the need for escrow funds.
Bottom Line: We’re there every step of the way
Southard Financial is the go-between for the sellers and the buyers (and their lawyers) in what can often be an extremely complicated matter. By pulling back the curtain in this series of articles, we hope that you have a better picture of what is ahead as you prepare to sell your business. And we hope that you can see how valuable an experienced transaction specialist can be! We are the reputable third-party advisor that both sides trust to make sure the entire transaction is handled smoothly and professionally.
When you’re ready to sell, give us a call and let us see how we can help. Connect with us online to schedule a call. Or call us directly at 901-761-7500.