1st edition
Sell Your
Business:
The Step-by-Step Legal Guide
by Attorney Fred S. Steingold
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Editors JAKE WARNER
MARCIA STEWART
Cover Design SUSAN PUTNEY
Book Design TERRI HEARSH
Proofreading SUSAN CARLSON GREENE
CD-ROM Preparation ANDRÉ ZIVKOVICH
Index BAYSIDE INDEXING SERVICE
Printing DELTA PRINTING SOLUTIONS, INC.
Steingold, Fred
Sell your business : the step by step legal guide / by Fred S. Steingold. 1st ed.
p. cm.
ISBN 1-4133-0018-9 (alk. paper)
1. Sale of business enterprises Law and legislation United States Popular works. I.
Title.
KF1659.Z9.S762 2004
346.73'065 dc22
2003069060
Copyright © 2004 by Nolo.
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Acknowledgments
I wish to thank Jake Warner and Marcia Stewart for their superb editing,
invaluable guidance, and unflagging encouragement.
Thanks also to:

D. Choosing the Best Time to Sell 1/8
E. If You Need to Leave the Business, But the Time Isn’t Right to Sell 1/10
F. Staying Involved With Your Business 1/10
G. Protecting Your Future Ability to Earn a Living 1/11
2
The Key Steps in Selling Your Business
A. Figuring Out What Your Business Is Worth 2/2
B. Preparing Your Business for Sale 2/2
C. Creating a Plan for the Future 2/3
D. Marketing Your Business 2/3
E. Negotiating the Deal: Key Sale Issues 2/4
F. Signing a Sales Agreement 2/5
G. Closing Your Sale 2/5
Table of Contents
3
The Key Legal Issues in Selling Your Business
A. Take Presale Legal Protections 3/2
B. Understand the Differences Between Selling the Business
Entity or Just Its Assets 3/3
C. Be Clear on What You’ll Sell and What You’ll Keep 3/4
D. Understand the Transfer of Intellectual Property 3/5
E. Build in Legal Protections If the Buyer Stops Paying 3/6
F. Assure Your Ability to Earn a Living Later: Guidelines for
Noncompete Agreements 3/7
G. Limit Your Legal Liabilities to Third Parties Once the
Business Changes Hands 3/7
H. Protect Yourself Against Unintended Liability to the Buyer 3/10
I. Comply with State and Local Laws That May Affect Your Sale 3/11
4
Tax Considerations When Selling Your Business

D. Take Steps to Improve Business Profitability 7/16
E. Add Value to Your Lease 7/19
F. Communicate with Employees about the Sale 7/21
G. Clean Up Existing Problems 7/21
H. Nail Down Vital Relationships with Customers and Suppliers 7/25
I. Prepare a Checklist of Presale Tasks 7/25
8
Finding the Right Buyer
A. First, Look for Buyers Close to Home 8/3
B. Strategic Buyers 8/6
C. Special Concerns When Approaching Competitors 8/9
D. Marketing Your Business by Word of Mouth 8/10
E. Marketing Your Business Through Advertising 8/11
F. How Business Brokers Can Help Find Buyers 8/14
G. How to Quickly Size Up Prospects 8/15
9
Structuring the Sale
A. Asset Sale vs. Entity Sale 9/2
B. Lump Sum Payment vs. Installments 9/7
C. How to Structure an Installment Sale 9/8
D. Ten Strategies to Protect Yourself in an Installment Sale 9/9
E. Doing Future Work for the Business 9/14
F. Restrictions on What You Do Next: Noncompete Agreements 9/17
G. The Future of Key Employees 9/18
H. Keeping the Buyer Motivated 9/19
10
The Investigation Stage:
How Sellers and Buyers Check Each Other Out
A. The Buyer’s Investigation of Your Business 10/4
B. Honesty Is the Best Policy: The Importance of Full Disclosure 10/5

C. Dealing With the Purchase of Accounts Receivable: Asset Sale 14/6
D. Sale Price: Entity Sale 14/7
E. Deposit 14/8
F. Payment at Closing 14/9
G. Promissory Note 14/10
H. Security for Future Payment—Asset Sale 14/11
I. Security for Future Payment—Entity Sale 14/12
15
Dealing with Liabilities and Representations
A. Liabilities in an Asset Sale 15/2
B. Liabilities in an Entity Sale 15/5
C. Representations—What They Are and Why They Matter 15/6
D. Seller’s Representations 15/6
E. Buyer’s Representations 15/10
16
Payments for Noncompete and Consultant Deals
A. Agreeing Not to Compete With the Business After the Sale 16/2
B. Agreeing to Work for the Business After the Sale 16/3
17
Other Important Legal Language for the Sales
Agreement
A, Contingency Clause 17/2
B. Closing Arrangements 17/3
C. Dispute Resolution Clause 17/5
D. Technical Contract Clauses 17/6
E. Additional Optional Clauses 17/8
18
Signatures on a Sales Agreement
A. Required Signatures for a Sole Proprietor on a Sales Agreement 18/2
B. Required Signatures for an Entity on a Sales Agreement 18/2

A. Covenant Not to Compete 21/2
B. Contract for Employment 21/6
C. Contract for an Independent Contractor 21/9
Part 5: Closing the Deal
22
Preparing for a Smooth Closing
A. Where and When to Hold the Closing and Who Should Attend 22/2
B. Documents for Transferring Assets 22/3
C. Documents for Transferring an Entity 22/5
D. Handling Last-Minute Problems 22/5
E. Moving On 22/5
Appendixes
A
How to Use the CD-ROM
A. Installing the Form Files Onto Your Computer A/2
B. Using the Word Processing Files to Create Documents A/3
C. Using PDF Forms A/4
B
Sample Purchase Agreements
Sample #1: Asset Sale of a Restaurant by One Sole Proprietor to Another B/2
Sample #2: Entity Sale of a Bookstore by the Two Shareholders
to an Individual B/8
Sample #3: Asset Sale of a Landscaping Business by a Single-Owner LLC
to a Partnership B/13
C
Legal Forms
IRS 8594, Asset Acquisition Statement and Instructions
Checklist of Presale Tasks
Potential Buyer Information
Confidentiality Letter

B. How This Book Can Help I/2
1. Overview of the Process I/2
2. Getting Ready to Sell I/3
3. Preparing a Sales Agreement I/3
4. Preparing the Promissory Note and Other Important Sales Documents I/3
5. Closing the Deal I/3
C. Working Efficiently with Lawyers, Accountants, and Other Professionals I/3
I/2 SELL YOUR BUSINESS: THE STEP-BY-STEP LEGAL GUIDE
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 professionals, 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 are small and mid-
sized businesses: retail stores, beauty salons, quick-
print shops, restaurants, tax preparation services, land-
scapers, electrical contracting firms, and modest
manufacturing operations—to mention just a few.
Keep in mind that no matter what kind of business
you own—a professional services company, a
neighborhood bagel shop, or a home-based website
that sells imported garden tools—there’s likely to be

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.
B. How This Book Can Help
Unlike other big transactions in your life, such as
selling or buying a house, a business sale doesn’t
follow a paint-by-numbers routine where an estab-
lished market and well-established procedures are
more or less controlling. Instead, each business sale
is somewhat unique; there are no standard procedures
to follow. This means that you and the buyer must
work out the answers to a number of important
questions. And, especially, this book explains the
territory—from legal and financial terms and how
deals are structured to the nitty-gritty of what goes
into a sales agreement and what happens at a closing.
To make it easy to find what you need, I’ve
organized this book into five sections with an
appendix of dozens of legal forms and a CD-ROM so
that you can tailor the sales agreement and other
legal documents to fit your particular sale. Here’s a
brief overview.
1. Overview of the Process
The first six chapters explain the entire sale process,
so you’ll know what to expect. You’ll learn how to:
• decide whether or not to sell
• time your sale
• prepare for the practical and legal steps involved
in successfully selling your business

ment—the crucial document that you prepare and
sign after you and the buyer agree on the price, terms,
and legal structure of the sale. The sales agreement
ties together all the sale terms. Whoever prepares
the first draft—you, the buyer, or a lawyer—you need
to understand the legal consequences of every clause.
The seven chapters in Part 3 show you how to put
together a sales agreement that’s clear, complete,
and legally binding. The agreement will cover such
important issues as:
• how the buyer will pay for the business—one
lump sum or installment payments
• which business liabilities you’ll be responsible
for
• your promise (if any) not to complete, and
• employment and consulting deals.
4. Preparing the Promissory Note and
Other Important Sales Documents
Part 4 (Chapter 19-21) of the book shows you how
to put together the other documents and papers
you’ll need to complete the sale of your business,
including:
• the bill of sale
• promissory note
• security agreement, and
• covenant not to compete.
These documents help assure that there will be no
slip-ups or delays when the time comes to turn over
the business to the buyer.
5. Closing the Deal

entire sale of your business. In fact, you stand to save
thousands of dollars. Once you firmly grasp every
step of the sale process, you can act as a knowl-
edgeable general contractor, with your professional
advisors serving as your cost-efficient subcontractors.
This book will help you along that path.
Icons Used in This Book
Warning: This icon cautions you to slow
down and consider potential problems.
See an expert: This icon lets you know when
to seek the advice of a lawyer, accountant,
or other expert.
Fast track: I use this icon to indicate that
you may be able to skip certain material
that may not be relevant to your situation.
Recommended reading: This icon is used
when I suggest other books or resources for
more information about a particular issue or topic.
Tip: This signals a special suggestion that
will help make your sale go smoothly—or
will assure that legal requirements are met.
CD-ROM: This icon means that the form
discussed in the text is on the CD-ROM
included in this book with a tear-out copy in
Appendix C.
■


Chapter 1
Deciding Whether—And

few years and sell later. Hopefully, by explaining
exactly what’s involved in the sales process, this
book will help you decide.
When planning to sell a business it almost always
pays to pace yourself. Few businesses are sold over-
night, 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 for a possible sale later.
A. Deciding Whether or Not to Sell
Can Be Agonizing
You’re not alone if you start out believing that the
decision to sell or keep your business is strictly a
matter of dollars and cents. Many other business
owners have shared this belief. So as you go through
the decision-making process, you may be surprised
to discover that in addition to monetary concerns,
selling a business almost always involves an array of
personal considerations as well. It’s perfectly normal
if part of you wants to sell, while another part is not
so sure. And, of course, there may be other decision
makers in the picture: Co-owners, family members,
investors, and key employees may also weigh in on
whether it’s a good time to sell. For example, if your
long-time co-owner is moving to Barcelona and wants
to sell now, you may have little choice but to agree.
Or poor health may dictate that you find a buyer as

change. So, in some instances, it may make the most
sense to also explore the issues with a knowledge-
able outsider—such as a successful and respected
entrepreneur in your area—who can offer more
objective insight.
And even if you conclude that it’s best for you
and your family to move on, you may still face the
problem of actually letting go. Although you may
know that your health, age, or changing interests mean
it’s time to sell, the fear of stepping into something
new can lead you to experience considerable anxiety
and may even cause you to pull back when it would
be wiser to move ahead. In a sense, creating and
growing your business is a little like nurturing a
child to maturity. If you’ve successfully helped your
children spread their wings and fly off on their own,
perhaps it will be easier for you to similarly shed
your business.
But just as the prospect of freeing yourself from
business worries can be enticing, you’d be typical if
you also had lingering doubts: