Selling a Business – Get a Lawyer
Use the same measure for selling that you use for purchasing. - Abu Bakr
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Smallbiztrends writer Anita Campbell posted an article today about selling a business in response to a reader who had written her asking how to go about selling the business. Ms. Campbell illustrates how using a business broker can be beneficial in selling the business and well worth the fees they charge. It is good advice. But, I want to add some critical considerations and make the pitch that the first professional you need to retain is an experienced, recommended, business attorney before you deal with anyone else.
Simply put, if you are considering selling a business – get a lawyer.
In the article, the reader was asking about an inherited family business. A broker is going to sell it for the best dollar they can get. A lawyer will do a complex analysis to determine whether the sale should be a stock or asset sale – regardless of sale price – so it benefits the client. A lawyer can determine whether the buyer counting on depreciation or paying an initial higher price is a better way for the sale to proceed. These are critical determinations that need to be looked at. Especially where the business is inherited. The IRS may decide the initial basis in the business was zero. If the sale is an asset sale, this business owner will face income tax. If it is a stock sale, the business owner pays only capital gains tax, but if the basis is very low maybe an asset sale is better. Highest price is NOT always the best – unless you are a business broker and your commission depends on the sales price.
Your lawyer can review business broker contracts. I have reviewed contracts from business brokers that border on unethical. Part of the reason businesses take so long to sell is because the broker usually demands an exclusive right to sell the business for a year or more. There are bad brokers who do not present legitimate offers or alternative purchasing proposals that may work for the seller – but, not the broker's commission.
Your lawyer can conduct docket checks, background searches, and due diligence on potential purchasers. There are many purchase and sue scams out there. A buyer purchases the business. The buyer complains immediately that the businesses return on investment is below what was stated. Buyer threatens suit, but is willing to settle for a return of a percentage of the sale price. A lawyer will tell you if the buyer has been sued before or has sued. The broker does not return a portion of his fee if you return part of the purchase money to the seller.
It is easy to find a qualified lawyer in your area. Call the local bar association or go online and search by your county. All bar associations have a referral service (for example, the Cleveland Metropolitan Bar Association is the one I belong to) where experienced lawyers are listed in categories specific to the issue you need. When selling your business, you are going to want an experienced business attorney with tax knowledge or access to tax attorneys and perhaps some estate planning experience. A good small to mid-sized regional business firm will be less expensive than larger firms.
Now, understand I may be biased because I am an attorney. But, in my opinion, talk to the hourly professional (committed by law and ethics to your interest) first, before committing to the percentage based sales professional.
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By Tanya Middleton, April 15, 2008 @ 2:05 pm
Thanks for the tip, I know that selling a business can not only be hard and complicated, it can be an emotional task as well, best left to a professional. Sometimes you can oversee things in your business that you hadnt realized until you were informed. I actually work with Microsoft, and right now I’m really excited to spread the word about the “Vision to Venture” tour they’re having between April and May, which will consist of five live events. Featured speaker, John Jantsch is a marketing and digital technology coach, award-winning social media publisher, and author of Duct Tape Marketing: The World’s Most Practical Small Business Marketing Guide, as well as many other speakers offering industry tips. The tour is fully geared towards entrepreneurs and business owners/developers.You can see more and register at http://smallbusiness.officelive.com/v2v/ so let me know what you think! And if you have any questions, I’d be more than happy to answer them !
By Anita Campbell, April 15, 2008 @ 10:31 pm
Hi Gregory, excellent point. It’s critical to get an attorney involved early on. A good friend of ours who is an attorney mentioned that he had to work all weekend recently. We asked why and learned that his client had contacted him on Thursday to “draw up the paperwork” to complete the sale of a business the following week. Talk about waiting until the last minute! Not a whole lot of proactive planning that can be done in those circumstances — just damage control.
Anita