Selling a Business

What is the value of my business? There are four methods which are generally used to calculate the sale value of your business:

  • Income value is derived by making an analysis of the revenues that the business generates. This can also be called the profit multiplier or Price to Earnings or P/E Ratio. If the business’ adjusted net profit is $100,000 per year, and you use a multiple of 4, the business’ value will be calculated as: 4 x $100,000 = $400,000.
  • Asset value is the total market value of all the assets the business owns. Simply, it’s the total value of the business assets including furniture, copyrights, properties, etc., the business holds minus any liabilities.
  • Comparable value is derived by looking at comparable businesses that have been sold recently or other similar businesses with an already derived purchasing value.
  • Industry-specific value is derived by using, industry-specific values: Does your industry have a specific formula used in establishing a business’s value? Ask your financial professional.

What can I do prepare for the sale of my business?

When contemplating putting your business on the market, be sure hire a business lawyer who has handled a sale of business transaction in the past. Also, it is important to have a financial professional who has had the same experience. Both professionals will be able to assist you in a pre-sale audit.  You professionals will audit the businesses financial records for irregularities, make sure all of your vendor contracts, employee contracts, etc. are legally sound.

How do I protect my trade secrets when selling my business?

When a potential buyer is looking at the inner workings of your business you want to protect your business secrets from being divulged to third parties or being used by the potential buyer to compete against you in the future. This can be done with a confidentiality agreement of what is commonly called a non-disclosure agreement. This will create a legally binding obligation between you and the potential buyer, that the buyer cannot divulge or use the knowledge he/she learns about your business for any other purpose but deciding whether to buy your business.

What if the Buyer wants an escrow agreement to be held into the future to protect against any misrepresentations?

In many instances the purchaser will demand that proceeds from the purchase price of your business are to be held in escrow. These escrowed monies are there to protect the buyer from false representations the seller may have made. Escrow monies typically range from 10 to 20 percent of the purchase price. As a seller you will want to keep the amount of escrow and the length of time it is held to a minimum.

How long will it take to sell my business?

We have turned around sales in as little as 30 days, however, you more realistically you should expect that a sale without obstacles will take from 6 to 8 weeks. Sales of more complex businesses and with obstacles will usually take longer, about 3 to 4 months. Sometimes, it can take up to 1 year.

I don’t want to be responsible for anything after I sell my business. How do I accomplish this?

When selling your business, you will likely provide a representation and warranties section in the sales agreement. Full disclosure will protect you from a breach claim by the buyer. Disclosure can be used to make full disclosure to the buyer and can be detailed enough to provide you with cover from any future claims by the buyer.

In most cases you will limit your liability to only those business activities before the close of the sale of your business. However, in a sale where the any future liabilities are being bought as well, baskets and caps are typically included within the representations and warranties section, by a seller in a purchase and sale agreement. When a seller makes a representation, there is typically an indemnification for the buyer,“your watch my watch,” to protect it from such representations being false or inaccurate.

Can I provide seller financing to the buyer?

As incentive to motivate a buyer, or as a way to earn a return on the value of your business you can structure your sale with different types of seller financing. For example, you can choose to be paid with equity of the buyer or cash. You may choose to have the buyers over a period of time in a note (seller financing), or as contingent consideration based on performance of the business in the future (also known as an earn-out).

Earn out issues can be an impediment to such a transaction. For example, the the seller is no longer at the helm in order to oversee the business’ direction post-closing. Certain assurances as to the buyer’s financial resources to run the business can also raise concern.

In an earn-out purchase, the buyer pays partly in cash at close and in part to over time in future payments, based on the future performance of the company. There are different approaches this structure, one is provided as an example below. The earn-out payments can obviously become a point of contention in the future, as questions may arise if the buyer has met the earn-out goals or whether the seller inflated the earnings potential of the business.

Earn-out Payments. As additional [consideration for the [Shares/Purchased Assets]/merger consideration], at such times as provided in Section [2.11], Buyer [(or, at the direction of Buyer, [the Company or another/a] designee of Buyer so long as Buyer remains an obligor thereof)] shall pay to Seller with respect to each Calculation Period within the Earn-out Period an amount, if any (each, an “Earn-out Payment“), equal to the product of (i) an amount equal to (A) the Adjusted EBITDA for such Calculation Period, minus (B) the EBITDA Threshold for such Calculation Period; multiplied by (ii) the Earn-out Multiple; provided, that in no event shall Buyer be obligated to pay Seller more than $[MAXIMUM EARN-OUT PAYMENT AMOUNT] [for any Calculation Period/in the aggregate for all Calculation Periods during the Earn-out Period]. If the Adjusted EBITDA for a particular Calculation Period does not exceed the applicable EBITDA Threshold, no Earn-out Payment shall be due for such Calculation Period.

Call and speak to an Ocean County Business Lawyer today about your transaction!