Selling anything more than a hot dog stand is a significant business undertaking that typically requires months of preparation and execution. While there's no single, prescribed path, the following steps offer a valuable framework for sellers aiming to maximize their final payout while simultaneously reducing the potential for problems down the road. 

Professional advisers, such as attorneys and certified financial planners, should be engaged at step one.  

Update books and records 

Preparing financial and legal records for a sale requires a shift in perspective. While a business owner may have operated with less scrutiny in the past, potential buyers will conduct thorough due diligence. Therefore, sellers should meticulously review all documentation, anticipating detailed inquiries. This includes scrutinizing legal agreements, financial statements, and ownership structures. 

If multiple entities or personal assets are intertwined with the business, ownership should be clarified and assets transferred as needed to streamline the sale. A thorough review of financials is crucial. Unusual or questionable entries, such as an owner's artificially low salary or personal expenses disguised as business costs, should be addressed. These common practices, while perhaps justifiable during ownership, can raise red flags for buyers and detract from the perceived value of the business. 

The clearer and more transparent the financial picture, the smoother the sale process and the stronger the seller's negotiating position.

Valuation

Business owners should engage a professional valuation expert to obtain an objective assessment of their company's worth. While this valuation may not represent the final sale price, it provides valuable insight into how sophisticated buyers perceive and value the business. 

Furthermore, the valuation process itself can be beneficial, as experts often offer guidance on adjustments to financial records and operational practices that can enhance the business's attractiveness to potential buyers.

Solicit bids, entertain offers

The first two steps might take several months to complete, evidencing the need for patience. But, at this step, with clean books and records and a professional valuation in hand, it is now appropriate for the seller to solicit bids or entertain potential offers. 

The business owner might also consider working with a business broker.

Letter of intent

The first written agreement between the parties is the letter of intent. It is far short of the detailed purchase and sale agreement, but offers the opportunity to negotiate the finer points of the deal. The letter of intent is typically nonbinding on the issue of whether the buyer must purchase the business at a stated price, but instead is binding on other matters. 

It generally requires that, in exchange for investigating the company and learning seller secrets—and both parties spending time and money—each party agrees to certain conditions that are binding.

Parties generally will be bound to conditions, such as: nondisclosure, keeping all information confidential; noncompetition, not competing against the seller, ever; nonsolicitation, not soliciting customers or employees from the seller; and a period of exclusivity where they can only discuss the purchase and sale with each other.

Due diligence

After signing the letter of intent, the seller grants the potential buyer access to the business for due diligence. This process allows the buyer to thoroughly investigate the business to confirm its suitability for purchase. 

During this phase, the buyers and their representatives likely will be present on-site, interacting with employees, and reviewing various aspects of the business. Sellers should not only prepare for this in-depth scrutiny, but also carefully consider how and when to communicate the reason for the buyer's presence to their employees.

Purchase and sale agreement

Both parties will then work to establish a purchase and sale agreement that encompasses all the terms of the proposed deal and is the defining document capturing each party’s rights and obligations. 

The parties should assume that the purchase and sale agreement will be traded back and forth several times between the parties and their attorneys as the details of the transaction get ironed out. The purchase and sale agreement is signed with a closing date usually set for a future date that is weeks or months out.

At the prescribed date and time defined in the purchase and sale agreement, the formal business transition takes place. This can be asset transfers, or stock transfers, or both. It is the formal time that the seller ceases to own the business.

Post-closing obligations

In many business sales, the parties maintain obligations to each other for months, or even years, after closing. The deal might structure in holdbacks, or earn outs, or contingency payments, or employment agreements.

Each of these potential post-closing obligations must be complete before the deal is finally, truly done.

Beau Ruff is an attorney and director of planning at Cornerstone Wealth Strategies Inc., in Kennewick, Washington.