We’re speaking with attorney Fred Steingold, an expert on small business law. We’re going to talk to him about the issues that arise when you’re buying or selling a business. Fred is the author of “The Complete Guide to Selling a Business,” from Nolo.
NOLO: Fred, is it harder to sell a retail business versus a service business? What are the concerns when you’re selling these types of businesses?
FRED STEINGOLD: I think that those concerns are probably greater on the part of the buyer. The buyer’s going to be interested in what kind of inventory you have, for example, in a retail business, and the location will be very important. In a service business, the location may not be quite as important; if you have an electrical contracting business you could be out someplace off the main drag and still be doing business, but the buyer in that situation is going to want to know about your contracts; do you have long-term contracts and can they be assigned to the new owner? So, the buyer’s going to have different concerns and different focuses depending on whether it’s a retail or a service business.
QUESTION: Here’s a tough question for a lot of people: what makes a business saleable?
FRED STEINGOLD: In order for a business to be saleable, you have to put yourself in the shoes of a buyer, and look at what kinds of things a buyer will want. Probably the most important thing is that the business has a good profit history. The buyer wants to see that the business has made money for the last couple years at least. Also, not only that it’s made money, but if the buyer is going to work in the business, which is very common for a small business, the buyer will want to see that there’s enough money coming in to pay a decent wage for the time that the buyer puts in, in operating the business. The buyer wants to know that there’s a lease in place, and that he or she will be able to continue on in that location after the purchase. The buyer’s going to want to see that the place of business is in good repair and is neat and attractive-looking, and, if it’s a retail business, that the inventory of goods is up to date. Those are the main things I would say that a buyer is going to be looking at. If the business has an exclusive distributorship, the buyer’s going to want to be able to take that over as well.
QUESTION: So, what you’re really saying is that it’s all about timing, right?
FRED STEINGOLD: Yeah, that’s right, in terms of business itself. Sometimes there are external factors, though; sometimes there are business cycles, and of course you’d like to be in an upswing kind of a situation where business is perking, but even in a bad business cycle, there might be opportunities. For example, sometimes corporations are laying off managers, and they’re sometimes offering a buy-out package, and so those managers, who are tired of being wage-slaves, may have a pocket full of money, and may be looking for an opportunity to go into business, and sometimes even when things are bad in the big business world, there may be opportunities for someone to sell a business.
QUESTION: What if you want to sell your business, but your partners or the other owners don’t want to sell, or what if you can’t seem to agree on the selling price? How do you sort these things out?
FRED STEINGOLD: One way would be to see if they’ll buy you out. Give them a price for your interest in the business, talk to them about some installment terms, and maybe they would buy you out, and you’ll be free to go elsewhere, and they’ll wind up owning the business and they can continue it as they wish. If that doesn’t work, you might want to call in a mediator to figure out how to resolve it, or some neutral third party to help create a win-win situation. In some situations, you may be able to force a sale; for example, if you have a partnership, if any of the partners wants to dissolve it and there’s nothing to the contrary in the partnership agreement, you’d be able to, on your own, just say, “Well, we’re going to dissolve the partnership,” and that would mean the assets or the business would have to be liquidated, and you would get out that way. Probably it’s a good idea, when you go into business with people, at the very beginning, have a plan of action, so you don’t have to worry about this later; you might have an agreement upfront about what you would do if one of you wanted to sell and the others didn’t.
QUESTION: Sometimes you read about a business that sold, but the owners stay on to run it after it’s sold. How hard is it to negotiate something like that? And what’s your experience with these situations? Is it hard for former owners to work for someone else?
FRED STEINGOLD: It’s hard sometimes, but the former owner would have to put aside his or her ego. It’s not difficult to make these arrangements however. In fact, most buyers like the seller to stay on for awhile as sort of a transition. Buyers like to do it; for one thing, they get some extra money during that period, they’re going to be either an employee or a consultant, and whether it’s months or even a couple years, they’re going to get some cash for their work, and it lets them stay tied to the business. I suppose there are buyers out there who want to start with a clean slate and don’t want to have anything to do with the seller, but that’d be fairly rare, and if the seller is willing to stay on and watch as his or her baby changes hands, that is very workable. It’s important to have the ground rules set out in advance, though; it probably is part of the sales agreement for the business. Is it going to be an employment relationship? If so, how many hours is the seller expected to work? How long will the relationship last? If it’s an independent contractor relationship, what are the terms of it? Those things should be spelled out so that there’s no misunderstanding, and I would think as a seller if you have any questions at all about it, you’d want to have the option after a certain number of minimal months to just walk away from it, if you find you can’t work for the buyer.
QUESTION: You read sometimes, for example Ben & Jerry’s, where you hear that the owners say that despite the sale, the company won’t change the product, or won’t change the company’s method for dealing with employees. Is it unrealistic for a small business to seek these types of conditions as part of the sale?
FRED STEINGOLD: You know, in an ideal world, you could leave your imprint on the business, and have it run your way forever, but most buyers are gong to be as entrepreneurial as you are; they’re going to want to put their own mark on the business, they’re going to want to do it their way, they’re going to want to take advantage of the good things that you’ve done, but they may see things differently, they may see things that they think they can do better, and so it’s best to find someone as a buyer if you can who has the same philosophy as you do, but if you try to reign them in too much, you may lose the sale of the business, so I don’t think it’s realistic to expect that the business will go on exactly as you’ve always run it.
QUESTION: In your book, you talk a lot about the preparation needed to sell a business. Can you tell us some of the things a business owner needs to think about when they’re selling?
FRED STEINGOLD: First of all, if you have a business that has had a shaky profit record, you might want to put off selling. If you wait and build up the profits, and that may mean you have to cut back on expenses, or you have to increase sales, but you have to do what you can to show a good profit picture for two or three years. If you have some outstanding legal problems, suits by an unhappy customer or a disgruntled employee, you want to get those cleaned up so that those aren’t inherited by the buyer, or you don’t get any bad press over them. You want to be sure that you’re able to explain the finances clearly; some businesspeople understand the finances of the business but they don’t keep their books in a form that someone else coming in from the outside could understand, so you might have to get a CPA to get your books organized so that the cash flow and the month-to-month profits can be understood by someone who is a prospective buyer. If you can, have a business plan that will show that the business is capable of growing over the next several years. The buyer may have a business plan as well, but if you’ve got something to kind of lead the way, that’s helpful. You want to try to make sure you’re your relationships with your suppliers and your customers are going to stay in place; you want to have contracts if possible. This won’t be true in a typical retail business, but if you have long-term relationships with suppliers or major customers, if you have contracts that will keep those relationships ongoing, that would be a positive thing. You want to see if you can get a long-term lease so that you have something of value to offer to the buyer. Probably equally important, if your business premises are kind of run down, fix ‘em up, put on a fresh coat of paint, put in better lighting, do some things to make it look more attractive. Those are some things that a business could do to get ready to sell.
QUESTION: Your book has an excellent agreement for the sale of a business. But is it really possible to do the sale without the aid of an attorney?
FRED STEINGOLD: You could do the agreement; theoretically it’s possible to avoid any help from an attorney, but that’s not really a good idea. If you’re selling a business you’re going to be dealing with tens of thousands of dollars, maybe even, hopefully, hundreds of thousands of dollars, and I think it’s a good idea to run the final product by a lawyer. The more you can do the better; it’s going to save you lots of money. Where it might take a lawyer five or six or even ten hours to handle a transaction, you might be able to just use one hour of a lawyer’s time, so you’ll be saving a great deal of money doing it that way, but you’ll also have the piece of mind of knowing that some professional has looked over your handiwork.