The Stages in Buying and Selling a Company, Part 1

The sale and purchase of a business can be complex here are 3 key stages to consider.

The purchase and sale of a business involves a range of important legal considerations that Buyers and Sellers should consider.

In this, and in the next two articles, I’ll provide readers with an outline of the business purchase and sale process in 6 distinct stages. I’ll cover stages 1-3 in this article, stage 4 in the next, then stages 5 and 6 in the final installment.

Stage 1: Sellers Should Prepare Long Before Embarking on the Company Sale Process.

Business owners who contemplate selling their business often wait until an actual transaction is about to occur before adequately preparing for the purchase and sale process.

An important first step Sellers can take is to assemble a solid Team of Advisors that could include an experienced M&A attorney; a CPA; an Exit Planning consultant, and a Financial Planner to advise regarding sales and estate tax planning.

Business owners who’ve yet to connect with a potential Buyer should also become familiar with company purchase and sale intermediaries, including Business Brokers and Investment Bankers. They should also understand what it means to sell to a “strategic” partner versus a “financial” Buyer – such as a Private Equity firm.

While every Seller wants to fetch the highest price, many lack a genuine understanding of the “true” value of their business. It’s thus often advisable to obtain a Business Valuation to gain objective input on what a realistic sales price might be.

For companies that have never needed formal “financials” – such as Balance Sheets, P&L, and Cash Flow Statements – preparing Financial Statements is often in order.

Whether Financial Statements should be “reviewed” or “audited” will depend on circumstances, but potential Buyers usually want more than merely spreadsheets or QuickBooks printouts showing the business’s financial history.

Sellers should also know that, eventually, everything about the company will be closely scrutinized during a process known as Due Diligence. Buyers will want to “look under the hood” by, for example, reviewing all the company’s Business Records and Agreements, and, by also gaining an understanding of the business’s operations.

Stage 2:  Deciding on the Right Type of Transaction – The Stock versus Asset Deal

When we speak of a business being sold, we also need to consider how to properly structure that sale.

In general, there are two ways to structure a company sale:

1.   A Stock Sale (or in the case of an LLC, an “LLC Interest Sale”)

2.  An Asset Sale. Each type of transaction has its unique features.

A Stock Sale occurs when a Buyer purchases 100% of the stock of the Seller’s business.

In an Asset Sale, a Buyer purchases all (or select) assets of the Seller’s business, and the Seller retains its stock ownership in the company.  Some key considerations:

In a Stock Sale – sometimes preferred by Sellers – a Buyer typically acquires not only all the Seller’s assets, but some, or all, of its liabilities.

In an Asset Sale – sometimes preferred by Buyers – a Buyer can be more specific as to which assets it wants to purchase, and the Buyer usually does not acquire the Seller’s liabilities.

However, from the Buyer’s perspective, one possible downside of an Asset Sale is that an important asset necessary for the running of the business might unintentionally be overlooked by the Buyer.

Asset and Stock Sales can also have different tax consequences, so both the Buyer and Seller should separately consult a tax attorney or CPA to advise them before undertaking either type of transaction.

Next page- Stage 3: The Pre-Acquisition Outlining of Initial Terms