Task List Reviewed by Momizat on . For When a Client Wants to Sell Their Business The authors in this article share a checklist developed and provided to firm clients contemplating a sell of thei For When a Client Wants to Sell Their Business The authors in this article share a checklist developed and provided to firm clients contemplating a sell of thei Rating: 0
You Are Here: Home » Mergers and Acquisitions/Exit Planning » Task List

Task List

For When a Client Wants to Sell Their Business

The authors in this article share a checklist developed and provided to firm clients contemplating a sell of their business.

Following are the steps involved when a client wants to sell their business. Buyers can also use this list as a timeline and road map of the steps that are expected to occur and what is expected of them.

❏  Be sure client wants to sell

❏  Be doubly sure client wants to sell. Them saying it does not make it so. Many prospective sellers start the process but do not have the commitment to sell or desire to leave the business. Without that commitment, the deal will not close and then all the efforts would have been for naught, except for the “education” the client paid for, which likely will help immensely when they are really ready to sell; unless the client decides to work until they drop. We believe the process is a very revealing business and owner self-assessment tool that does create substantial value and benefit, just that it is not what the client expected when they signed on to get started, and we tell them that. Most business owners spend very little time on self-reflection or looking at the big picture of the purpose, benefits, and value of the business and this provides it. If it leads to the sale, then that is what the client wanted. If it leads to a withdrawal from the market, then that is good too. We have many experiences that could illustrate this, but for now, we try to make sure the client knows what they are getting into.

❏  Ask client for assurances that his or her spouse or partner is on board with what they will be doing, i.e., selling the business and paving the way for a “retirement”

❏  The seller needs to be made aware that they will have to provide full and revealing information about their business and will not be able to hold back anything

❏  Seller also needs to understand that they will be required to spend considerable time on the entire process, and this might interfere with operating the business

❏  A transactions-based attorney needs to be engaged

❏  The business’ accountant needs to be notified, if they were not part of the initial decision process, and be brought on board as soon as the project starts

❏  Prepare a transaction information fact sheet with some basic information about the business

❏  Possibly engage an M&A advisor, investment banker, or business broker to either advise client or find a buyer or buyers

❏  Have a valuation specialist determine the value and help client decide on the asking price and what he or she should settle for, the amount they should not go below, and the terms

❏  In many transactions, the terms can be more important than the actual transaction price, so client should pay particular attention to what they will be getting, and when

❏  The accountant should model out the tax methods and consequences of various methods of the sale, including what the client would net after all costs and taxes and the possible cash flow seller would end up with afterwards

❏  Client should have a discussion with potential buyers to determine interest level and if client thinks they are serious

❏  The potential buyers should be requested to provide some sort of assurances they have funding available and of their financial viability

❏  The attorney should prepare a confidentially or nondisclosure agreement letter for the prospective buyer to sign before they are given anything beyond the initial fact sheet. Included in that agreement should be definitions and descriptions of what constitutes confidential information and what sensitive areas would require special access or arrangements.

❏  Note: It has been our experience that keeping these negotiations confidential is very difficult at best, so client should be prepared to deal with questions from other parties (including customers, suppliers, or key personnel) that tell you what they heard and ask for verification, or reassurance

❏  Have the buyer give you a letter of interest laying out suggested terms—this is the start of the negotiation process

❏  Once the letter of interest is received, you should start assembling the information the buyer would need to have the due diligence performed. Usually the buyer would give a listing of what they would like, initially. (Note: We have such a list that we usually give to our clients when the process starts. Please contact author(s) for this list if you are interested.)

❏  When a deal is agreed to in basic or general terms, request the buyer to present a thorough letter of intent (LOI). This is the start of serious negotiations and should be handled with the upmost focus and interest. The LOI would give the price and terms, based on representations the seller made. These representations would come from the financial statements, schedules, tax returns, and whatever other information was provided to the buyer. If the financial statements contain inaccuracies or noncompliance with GAAP (generally accepted accounting principles) or sound tax reporting such as inventory, depreciation, or revenue recognition rules, the price in the LOI will be nothing more than a starting point which would be reduced based on the buyer’s due diligence. Terms would usually be stated as cash or a specific payout schedule and could be subject to suitable financing arrangements (which are almost always subjective) obtained by the buyer. Also, full details of the payout are occasionally not stated, such as being unsecured and subordinated to all other financing facilities. The LOI will also state who is responsible to pay any investment bankers, brokers, or anyone else involved in introducing and assisting the two parties.

❏  To be considered is whether an earnest money deposit should be made by the buyer when they give the LOI and conditions on its refund if the deal does not close

❏  The LOI will also include the due diligence period and conditions as to access to records. In today’s digital environment, much of the due diligence can be done virtually.

❏  Your attorney would review the legalities with you and if necessary, will suggest changes. The seller’s indemnities need to be reviewed and explained.

❏  You should definitely have the business’ accountant also review the LOI. They will look for deal breakers, price reduction instances, and weaknesses in the payout amounts and terms. They will also review the tax structure of the transaction. The difference between an asset and stock sale could result in added taxes as would the treatment of intangible assets and allocation of the purchase price, and the existence of compensation agreements and what health insurance and fringes would be continued, and an earnout of a portion of the purchase price.

❏  Also, to be reviewed by both the attorney and accountant, would be potential or contingent liabilities such as product warranties, and return, discount or advertising agreements or conventions or most favored nation understandings with customers

❏  When assets are sold, it will require a more detailed description of the assets and liabilities, and what would be excluded from the transaction. When stock is sold, there would be descriptions of what would be excluded and a “guarantee” of a capital or working capital amount at the closing.

❏  Once the LOI is signed, either your attorney or the buyer’s attorney would start preparing the contract of sale. While this is being done, issues will be raised that have not been previously discussed. These include the need for the buyer to review employment contracts, independent contractor and consulting arrangements, tax compliance filings, leases, licenses, trademarks and patents, vendor or customer contracts, warranties, insurance policies and claim history, regulatory issues, and myriad other items that you likely have not thought about in years, if at all.

❏  One of the things we look for in a LOI are the “zingers”, which we call hidden items the buyer inserts that give them all sorts of outs and indicate, to us, a lack of good faith. Remember that the seller is turning over their business to the buyer that most likely will owe a portion of the purchase price, might become an employer of the seller, and where a final adjustment of the price will be determined a few months after the sale based on meeting the benchmarks in the contract such as final working capital amount, inventory valuation, key employee, customer and supplier retention, severance pay costs, and possible regulatory approval. While good faith cannot be inserted into the LOI or contract, it is very important.

❏  Seller would need to discuss with the buyer whether any employees will be let go and the timing, and who will be responsible for severance payments

❏  The LOI would also define post-closing arrangements and events, time limits for this and who covers the costs

❏  The contract drafting will cause a new round of negotiations—not as serious as the previous negotiations, but the price or cash flow could be affected by the results of this. Included in this will be the amount held in escrow and how payments would be released and paid out. The contract will include covenants not to compete, details of notes payable by the buyer and lease assignments or if the premises are owned by the seller, then a new lease to the buyer.

❏  Occasionally, the seller might be asked to take some ownership in the entity that acquires the business. The terms of this would need to be described as well as the capital structure of the buyer, identity of other owners, and any restrictions on transfer of those shares.

❏  The LOI should make reference to pending litigation against the seller; this information would need to be provided beforehand. Occasionally, companies do not want to disclose this information before they know that the buyer is seriously interested.

❏  Other prospective buyers will need to be told that the client is selling to someone else. This is usually included in the LOI where the seller warrants that they will cease all activities in that regard. Also, a time deadline for closing the sale should be included in the LOI and a possible timetable.

❏  Seller will have to decide which of the personnel, if any, they will inform about what is going on or if they will want to keep it secret from everyone

❏  If there is an earn out, deferred payments, or some ownership that is retained, that will be covered more thoroughly in the contract and is usually negotiated as part of the purchase price

❏  If there are to be deferred payments, decide on the type of security or collateral, if any

❏  If there are deferred payments, seller should consult with an insurance agent to determine if a life insurance policy on the buyer is necessary and if it can be obtained. Seller should be told how those premium payments would be taxed.

❏  The interest rate on deferred payments will also need to be determined. If no interest is provided for, there would be imputed interest for tax purposes—make sure client understands how this would work.

❏  When the buyer commences the due diligence process, seller will need a “team” to assist with this. Once the LOI is signed, the due diligence process will likely start quickly.

❏  There will be some more negotiations and contract amendments, and seller should be aware of this

❏  The contract could be signed before the due diligence starts, during the due diligence process, or at the closing. This depends on the thoroughness of the letter of intent and timing of the sale.

❏  When the closing takes place, seller will get their money, usually a certified check, attorney’s escrow check, or a wire to seller’s bank, and any notes for deferred payment

❏  All professionals and those assisting seller on the team will need to be paid any balances due

❏  There likely will be some post-closing adjustments that will need to be negotiated. Usually the contract would call for indemnification of undisclosed liabilities in excess of an aggregate amount—watch for this.

❏  If the assets of the business were sold, rather than the corporate stock or ownership interests, seller would need to wind down and eventually liquidate that entity. This can take a few months or a few years depending on the circumstances. Seller will need their accountant and attorney to review this with them.

❏  If client sold the assets of an S corporation or another pass through entity, and had outside basis, they might need to liquidate that entity in the same year as the sale to be able to offset any gains with that basis. This is a very complicated tax move and client must be advised about this before the transaction is consummated.

❏  Client should not plan their vacation right away—they will need to hang around a while to assist in the transition to the new owners

❏  Client should plan a nice long vacation about three months after the closing and let the buyer know well in advance of their lack of availability during that vacation

Some deal points that come up that are not usually negotiated initially:

❏  Guaranteed net worth of the entity that is the buyer

❏  Financial statements usually need to be on GAAP, but many companies use a modified GAAP or income tax basis. It needs to be made clear what method the reports presented are on and that they should be acceptable as such, without GAAP adjustments.

❏  Software licenses for every computer

The above is a thorough list, but every deal is different and brings forth new sets of issues, things to do, or what to provide to the buyer. Use this as a guide to provide to client who should be made aware of the intricacies of the transactions before commencing so they will understand what they are getting started with.


Edward Mendlowitz, CPA, PFS, ABV, CFF, is emeritus partner with WithumSmith+Brown, PC, in East Brunswick, New Jersey. He has over 40 years of public accounting experience, is a licensed Certified Public Accountant in the states of New Jersey and New York and is one of Accounting Today’s 100 Most Influential People. The author of 28 books, Mr. Mendlowitz has written hundreds of articles for business and professional journals and newsletters and presented over 350 CPE programs. He writes a twice a week blog at www.withum.com/partners-network-blog.

Mr. Mendlowitz can be contacted at (732) 743-4582 or by e-mail to emendlowitz@withum.com.

Louis Young, CVA with WithumSmith+Brown, PC, in East Brunswick, New Jersey. He has been engaged to perform valuations primarily of closely-held companies and family limited partnerships. These valuations have been performed for estate and gift tax purposes as well as purchasing and selling businesses. Mr. Young has extensive experience in finance, with emphasis on the automotive industry. He has performed corporate financial planning, automotive factory financial statement analysis and departmental internal control analysis, been involved with mergers and consolidations and cash flow planning.

Mr. Young can be contacted at (732) 379-5218 or by e-mail to lyoung@withum.com.

The National Association of Certified Valuators and Analysts (NACVA) supports the users of business and intangible asset valuation services and financial forensic services, including damages determinations of all kinds and fraud detection and prevention, by training and certifying financial professionals in these disciplines.

Number of Entries : 2157

©2020 NACVA and the Consultants' Training Institute • (800) 677-2009 • 5217 South State Street, Suite 400 Salt Lake City, UT USA 84107

event themes - theme rewards

Scroll to top
UA-49898941-1
lw