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What is an Earn Out PaymentSelling a business often is a tumultuous, emotionally-draining experience for a business owner. Unless you’ve sold a business previously, the journey feels awkward and is marked with multiple high and low points.
To guide business owners, especially the first-time seller, we’ve created the 10 Steps to Selling a Business Infographic.
(Click on the image to view larger size. For more details, scroll down!)
1. An Unsolicited Offer to Buy your Business Arrives
Less than 10% of all business owners plan for the sale of their business and their eventual exit. Because this is so, most owners begin the journey selling their business after receiving an unsolicited offer to purchase. When they receive such an offer, they often scramble to learn what they should do.
In many cases, this first solicitation is not a good offer and often it’s from a competitor attempting to learn more about the competition. Without proper exit planning in place, a business owner should proceed with great caution. Unless they have previous experience selling a business, most of what follows is foreign territory.
2. Help, I need an M&A Advisor
Do It Yourself (DIY) is not recommended when selling a business. It’s wise to hire a Business Broker if the business for sale is considered to be a small business. Alternatively a Merger & Acquisition Intermediary is a good choice if the business is in the middle market.
Unfortunately, many business owners consider themselves a ‘jack of all trades’ and believe they can handle the sale of their business just as they have handled many other important matters in their business successfully. The problem with this thinking is that selling a business is unlike anything else the business owner has attempted in the past. One wrong move can be fatal.
3. What’s EBITDA? We generate profit!
EBITDA is just one technical term the buyers and M&A advisors throw around and expect the entrepreneur to understand. Business owners understand profit, loss, taxes, and how much is needed to fund payroll. While these matters are important to business buyers, most focus on EBITDA which is a fancy way of calculating cash flow.
4. Who May I Trust to Know I am Selling a Business?
Shouting the news that your business is for sale is not wise. Choose with great care with whom you confide. Key employees should be advised in advance under a confidentiality agreement as they will likely need to meet with potential buyers. Never share with your suppliers or customers your plans to sell your business until the buyer has made an offer you have accepted and disclosure becomes necessary in the Due Diligence stage.
5. The Painful Paperwork is Worse than Tax Season!
Valuing a business and producing the proper paperwork to support the marketing materials to be presented to potential buyers is time consuming. Preparing a business valuation and maintaining the proper paperwork in good order well in advance is advisable. These are just a few of the important steps taken when an exit plan is created.
6. We have our LOI… Is it Over Yet?
The receipt of a Letter of Intent does not mean the deal is done. In fact, the hard work is about to begin. Careful negotiation of the terms defined in the Letter of Intent is wise as it serves as the basis of the final Asset or Stock Purchase Agreement.
Although the Letter of Intent is typically not binding to the buyer and seller, not negotiating in good faith after a LOI has been signed is a recipe for trouble. This is another step in the process where your advisors, especially your Attorney, play a vital part in the outcome.
7. Due Diligence. Are We There Yet?
After signing a Letter of Intent with a buyer, the business owners turn their attention to finalizing the purchase agreements while the buyers are looking under the hood. Buyers ask for everything they can think of during Due Diligence and will (likely) ask for it several times!
Often a data room is set up where all of the pertinent closing documents are drafted and reviewed by all parties. The documents sent to the data room by the seller and attached to the final purchase agreements are very important. A skilled and cautious advisor will scour these documents for accuracy before they are submitted for review and inclusion in the data room.
8. The Attorneys are Fighting Like My Kids
As the seller and buyer approach the closing date, it is not unusual to find their respective legal representatives arguing about words and punctuation that seemingly mean nothing. Getting past this hurdle is not an easy accomplishment!
9. Signatures and Champagne
Sometime between the signatures and the champagne, a check or wire transfer will be delivered to the business owner. It’s time to celebrate!
10. No, Just a Long Weekend. I Have an Earn out
If the business owner has an Earn Out included in the deal, they shouldn’t celebrate too much. Since the pandemic decimated many company’s EBITDA, Earn Outs have become commonplace in deals.
An employment contract and non-compete are common components of the business sale, so it’s back to work on Monday!