How to Buy or Sell a Small Business

Buying or selling a small business can be a long process. Business transfers involve negotiations, legal paperwork, and research. You want to know that you're paying or getting the best price and that the deal will include everything you expect. Let's look at everything that goes into the sale and purchase of a small business.

Types of Purchases and Sales: Asset vs. Stock Purchases

Generally, the purchase or sale of an incorporated small business will be in one of the following forms:

• Asset Purchase: The buyer purchases some or all of the seller's assets. Buyers typically prefer this transaction because the buyer gets the assets, like equipment and inventory, without taking on the seller's debts and liabilities.
• Stock Purchase: The buyer purchases all or most of the seller's stock and "steps into the shoes" of the seller. Sellers often like this transaction because the buyer assumes all of the seller's debts and liabilities.

You can learn more about these kinds of purchases in our article on mergers and acquisitions.

7 Steps to Buying a Small Business

The basic steps to buying a small business are as follows:

1. Determine your budget and the type of business you'd like to buy.
2. Find a business to buy—either through word of mouth or an online marketplace.
3. Gather information about the business's finances and legal documents (a process called "due diligence").
4. Negotiate the business price.
5. Secure financing to purchase the business.
6. Enter into an agreement to buy the business.
7. Close the deal and complete the final paperwork.

Read on to learn more about the negotiation process, and the paperwork you'll need to close the deal.

6 Steps to Selling a Small Business

The steps for selling a business are similar to buying a business, but with a few additional considerations:

1. Prepare for the sale by cleaning up your financial records and organizing your legal documents.
2. Determine the value of your business, ideally with the help of a third-party valuation expert.
3. Find a buyer, either with the help of a broker or through your own communications or advertisements.
4. Negotiate the business price.
5. Document the transaction.
6. Wind up the business, which might include closing bank accounts, canceling insurance, and filing paperwork with government agencies.

You might consider hiring a broker, an attorney, or an accountant to help you with the process. Although you'll have to pay for their services, these professionals can save you time, help you negotiate the best price, and ensure you complete the proper paperwork.

The Process of Buying or Selling a Small Business

Regardless of how the transaction is structured, the process of buying or selling a small business usually flows like this:

• You'll work through preliminary negotiations.
• You'll draft a formal agreement and complete a pre-closing review.
• You'll finalize everything through the closing.

As early as possible in the process, it's a good idea to consult a lawyer and a financial adviser to help make sure that you get the deal you're after. When figuring out how to structure a deal, buyers and sellers are typically concerned mostly with minimizing taxes and potential liability issues.

Preliminary Negotiations & Discussions

During negotiations and discussions, the buyer investigates the seller to determine the value of the business. This due diligence process usually involves an extensive review of the seller's finances and assets so the buyer can make their own determination regarding the business's value.

How much due diligence the buyer does will depend in part on whether it's a stock or an asset sale. More due diligence is required in a stock purchase because—in addition to assets—the buyer is also taking on the seller's debts and liabilities.

The parties should discuss and determine other matters at this time, including whether:

• the shareholders or board of directors have to approve the sale
• any government or other third-party documents are required (such as a certificate of good standing or title documents), and
• any contracts require third-party approval before the buyer can take them over (like leases or loan agreements).

Letter of Intent to Purchase a Business

• how long the buyer and seller are willing to keep the deal open
• a binding promise by the purchaser regarding the confidentiality of the seller's trade secrets, like customer lists and other sensitive company information, and
• a binding promise by the seller not to negotiate a sale with any other prospective purchaser for a certain period of time.

In general, these letters are nonbinding: You usually can't force one party to buy or sell based on an LOI. Nevertheless, you can make parts of the letter enforceable and it's usually a good idea to do so, as noted above.

Formal Agreement and Pre-Closing

A formal, final agreement is the culmination of the negotiations. It contains all the details of the deal, including:

• the price
• the terms of the deal
• when the business or assets will be turned over
• whether the purchase money or assets will be held by an escrow agent, and
• other important items.

Usually, the agreement goes through many drafts and is finalized for the pre-closing and then signed at the closing.

At the pre-closing, there are many details to attend to. Both the seller and the buyer will want to make sure that all the proper documentation is in place to finalize the deal at the closing. Again, the extent and type of documentation will depend on whether it's a stock or an asset sale.

Closing the Sale of a Small Business

Closing is when the deal is completed. At this time, you'll want to make sure:

• all documents are signed and notarized if required (such as deeds and lease assignments)
• the sales proceeds are disbursed properly in accordance with the terms of the agreement, and
• necessary documents are recorded such as deeds and certificates of title to motor vehicles and other equipment or property.

This step is a very paper-intensive process and primarily involves both sides sitting down and signing a bunch of documents to make everything legal.

Questions to Ask Your Attorney

This article provides the basics of buying and selling a business. But, as you've probably already guessed, the process is detail-oriented and depends on multiple factors. If you want to buy or sell a small business, consider going to a business attorney with the following questions:

• How long will it take to buy another company's assets or stock?
• How can I be certain that a seller is giving me accurate financial information and documentation?
• Why should we use an escrow agent, and who should pay for that service?
• How much should I sell my small business for?
• What should I avoid doing when selling my business?
• What questions should I ask the owner before buying a business?

Your experience will be specific to your circumstance. Consider speaking with a lawyer who has experience with other businesses in your specific industry. For instance, if you're looking to buy or sell a restaurant, look for an attorney who's closed a deal with another local restaurant.