3rd edition
The Complete
Guide to Selling
a Business
by Attorney Fred S. Steingold
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Acknowledgments
I wish to thank Emily Doskow for her superb editing of the 2nd edition.
Thanks also to:
Marcia Stewart for building a strong foundation for this book in its first
edition
Jake Warner for his many helpful contributions and unflagging
encouragement
Mark Hartley, CPA, for his analysis of tax issues
Glen J. Cooper for his insights regarding business brokers
Terri Hearsh for her production magic
André Zivkovich and the Applications Development Department for
creating the CD-ROM, and
Susan Putney for designing the great cover.
About the Author
Attorney Fred S. Steingold is an expert on business law, advising
entrepreneurs on how to start, buy, run, and sell businesses. He is the
author of Nolo’s Complete Guide to Buying a Business, Legal Guide
for Starting and Running a Small Business, and The Employer’s Legal
Handbook. His monthly column, “The Legal Advisor,” is carried by trade
publications around the country.
Introduction
Your Companion for Selling Your Business
Is is Book for You? 2
Will You Still Need to Hire Lawyers, Accountants, or Other Professionals? 4
Part 1
Limit Your Legal Liabilities to ird Parties Once the
Business Changes Hands 40
Protect Yourself Against Unintended Liability to the Buyer 44
Comply With State and Local Laws at May Affect Your Sale 45
4
Tax Considerations When Selling Your Business
An Overview of Key Tax Issues 50
Understanding the Federal Tax Rate at Applies to Your Sale 53
Tax Issues When Selling the Business Entity 54
Selling the Assets of a Business 58
Asset Sale by a C Corporation 61
Asset Sale by an S Corporation 64
Asset Sale by a Sole Proprietorship or Single-Member LLC 65
Asset Sale by a Partnership or Multimember LLC 66
Allocation of the Purchase Price 66
5
Putting a Price on Your Business
ere’s No Universal Pricing Formula: Many Factors Affect Price 76
Sales of Comparable Businesses 78
e Income Valuation Approach 79
e Asset-Based Approach 80
Industry Formulas and Rules of umb 82
How Appraisers and Other Experts Can Help You Set the Price 83
Putting It All Together to Price Your Business 84
6
Working With Lawyers, Accountants, and Brokers
Lawyers 89
Accountants 93
Business Brokers 95
Part 2
e Future of Key Employees 187
Keeping the Buyer Motivated 189
10
e Investigation Stage:
How Sellers and Buyers Check Each Other Out
e Buyer’s Investigation of Your Business 193
Honesty Is the Best Policy: e Importance of Full Disclosure 195
Business Information the Buyer Will Want to See 196
Protecting Sensitive Information With a Confidentiality Agreement 212
Why and How You Should Check Out the Buyer 216
Practical Steps for Evaluating a Buyer 218
11
Drafting a Letter of Intent
Why Use a Letter of Intent? 224
What to Put in Your Letter of Intent 225
Why You Should Only Sign a Nonbinding Letter of Intent 227
Format for a Letter of Intent 227
Part 3
Preparing the Sales Agreement
12
Preparing the Sales Agreement and Other Legal Documents
Overview of Your Sales Agreement 238
Related Legal Documents 243
Well-Drafted Documents Are Crucial 244
Preparing Your Sales Agreement and Related Legal Documents 245
How to Prepare Attachments to Your Sales Agreement 247
Steps in Finalizing Your Sales Agreement and Other Documents 248
Amending Your Sales Agreement 249
13
Who’s Selling, Who’s Buying—And What’s Being Sold
Dispute Resolution Clause 312
Technical Contract Clauses 314
Additional Optional Clauses 318
18
Signatures on a Sales Agreement
Required Signatures for Sole Proprietors on a Sales Agreement 320
Required Signatures for an Entity on a Sales Agreement 321
A Spouse’s Signature on the Sales Agreement 323
Signature Clause in a Sales Agreement 325
Typical Formats for Signing a Sales Agreement 326
Accepting Personal Responsibility for Commitments in a Sales Agreement 329
Signing the Sales Agreement 332
Part 4
Preparing the Promissory Note
and Other Sales Documents
19
Promissory Notes and Other Installment Documents
e Promissory Note 338
e Security Agreement 348
e UCC Financing Statement 354
Escrow Agreement for Entity Sale 360
20
Bill of Sale, Lease Assignment, and Other
Documents for Transferring Your Business
Bill of Sale: Asset Sale 371
Bulk Sales Compliance 376
Assignment of Lease: Asset Sale 380
Assignment of Other Contracts: Asset Sale 381
Assignment of Intellectual Property 388
Approval of Entity’s Sale of Assets 389
Sample #3 Asset Sale of a Landscaping Business by a Single-Owner
LLC to a Partnership 447
Index
Is is Book for You? 2
Will You Still Need to Hire Lawyers, Accountants, or Other Professionals? 4
Your Companion
for Selling Your Business
I
INTRODUCTION
2
|
THE COMPLETE GUIDE TO SELLING A BUSINESS
T
hrough hard work, ingenuity, and
possibly a bit of good luck, you’ve
built a viable business. Now, you’re
ready to sell—or at least you’re thinking
about it. But the process may seem intimi-
dating, and you probably have lots of legal
and financial questions. Whether you want
to handle the whole sale yourself or work
with lawyers, accountants, and other pro-
fessionals, this book can help. It provides
step-by-step guidance to do it right—from
marketing and positioning your company in
preparation for the sale to negotiating the
best deal.
Each year, some 750,000 American
businesses change ownership. Most of these
about in The Wall Street Journal. It can help
you if you fit this profile:
•Youhaveabusinessthatmightsellfor
tens of thousands of dollars or even
several hundred thousand dollars, but
probably not more than $2 million.
•Youownthebusinessyourselforwith
one, two, or a handful of others.
•Yourbusinessissetupasasolepro-
prietorship, partnership, corporation,
or limited liability company (LLC).
•Youwanttosellyourbusiness—not
merge with the buyer’s business
and keep a long-term role in its
management (although you may work
as a consultant for a short transition
period).
Does this sound like your business?
If it does, then this book has exactly the
information you need to move forward with
a smooth and profitable sale.
INTRODUCTION
|
YOUR COMPANION FOR SELLING YOUR BUSINESS
|
3
Chapter Number What You’ll Learn
Part 1 (Chapters 1-6) How to:
• decidewhetherornottosell
• timeyoursale
Lawyers, Accountants, or
Other Professionals?
Selling a business for top dollar may not
seem like a job you want to tackle all on
your own. But, fortunately, the process can
be broken down into small pieces, each of
which you can understand and master. With
this book, you should be able to handle
much of the work yourself. And if you
call in a lawyer, accountant, appraiser, or
business broker as needed, you’ll be able to
explain just what you need and why.
This book will alert you to specific
situations in which you’re likely to benefit
from professional help. For example,
because your business and the deal you
strike with the buyer are unique, it’s a good
idea to have a lawyer review your sales
agreement before you sign it. Similarly,
although this book provides a lot of
information about the tax laws, analyzing
your individual tax exposure is a task best
left to an experienced expert such as a CPA
after you’ve reviewed the tax material here.
By doing much of the work yourself,
the fees you pay for professional services
should be far lower than what you’d pay if
you used experts to handle the entire sale
of your business. In fact, you stand to save
thousands of dollars. Once you firmly grasp
CHAPTER
8
|
THE COMPLETE GUIDE TO SELLING A BUSINESS
FAST TRACK
If you’ve already decided to sell your
business, you’re probably anxious to get on with
the job. at’s fine. Skim or skip this chapter and
move on to Chapter 2.
L
ike many other entrepreneurs, you
may be ambivalent about giving up
your business. For a variety of family,
economic, and emotional reasons, you may
be trying to sort out whether it makes more
sense to sell now or to soldier on for a few
years and sell later. Hopefully, by explaining
exactly what’s involved in the sales process,
this book will help you decide.
Pace yourself. Few businesses are sold
overnight, and when they are, they’re
commonly sold for too little. In fact, the
process of preparing and selling a business
for top dollar to a reliable buyer may take
two or three years to complete. It follows
that even if you decide not to pull the sales
trigger for a few years yet, you may be wise
to begin now to get your business ready.
Deciding Whether or Not
to Sell Can Be Agonizing
your business is stimulating and, on the
best days, you experience a heady rush of
adrenaline. You’d be less than human if you
didn’t wonder sometimes about whether,
after selling your business, you’ll mourn
the loss of these exciting feelings and
not know how to replace them. If you’re
contemplating retirement, your ambivalence
may be especially pronounced.
CHAPTER 1
|
DECIDING WHETHERAND WHENTO SELL
|
9
Sometimes It’s Not All or Nothing
Although this book focuses on the sale of an
entire business, that’s not the only way to
get a large chunk of cash out of the business
you’ve built. Sometimes it’s possible to sell a
part of a business and keep the rest. at’s
particularly feasible when a business has
multiple functions. en, you can continue
to enjoy the action but direct your time and
energies to the part of the business that you
enjoy most—or that you believe is the most
profitable. e key to executing this strategy
is usually to divide your business in a way that
attracts potential buyers to the bits you plan
to sell, while retaining at least the seeds of a
successful new enterprise. And, of course, you
customers to a skillful and reliable
contractor, and Lyle can count on
a steady stream of referral business.
Lyle agrees to pay Joe $30,000 for
theinstallationbusiness(payablein
installmentsoverathree-yearperiod),
plus 10% of Lyle’s net profits for each
of the next three years. Lyle also
agrees to pay a modest monthly rent
to Joe for the office and shop space
he’ll occupy. As part of the deal, Lyle
getstotakeover(andearnmoney
from)severalinstallationscurrently
in progress and ten that are about to
begin. Joe agrees that he’ll be available
to consult with Lyle about any on-the-
job design issues that arise. Finally, the
two agree that for three years Joe will
not reenter the installation business.
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