Once your broker has presented a buyer who is ready, willing and able to move forward, you’ve settled on a price, they put some earnest money down, its time for the due diligence.

Basically, there is where the potential buyer can take a deep dive into your business and operation to make sure it what he thinks and is comfortable with. Deals fall out all the time from due diligence so you are not home free yet.

For most buyers, this may be one of the largest transactions of their lifetime so if things aren’t what they thought, they’ll get scared off and back out of the deal. The time period is well defined, there is a definite beginning and end to the due diligence. Do you remember the 7 Key Profit Drivers in the first section of this book? These are due diligence deal closers! If you have implemented and know and track these 7 items, buyers have a huge boost of confidence and the unsure, unpredictable future doesn't come in to kill the deal.

There are some common things that potential buyers will want to see:

Verify the contracts with customers and vendors
Verify employee contracts or labor-management relationships agreements with local unions or other groups that are relevant to the business.
Verify bank balances, bank statements, financing agreements with bankers
Conduct a physical inspection of the physical location, equipment, and inventory.

Some business buyers want to have a “look see” period. Meaning that they come in and work side by side with you for a period of days. I had one deal go south a while ago during the due diligence period when the existing owner was boasting about how great, how smart, how good of a multi-tasker he was while talking to the potential new buyer. Guess what happened? The new buyer thought, “I cant do all that” and he got cold feet and backed out.

This is why the 7 Key Profit Drivers are so vital because they help you build a business not overly dependent on you.

Conducting Negotiations

It will help you during the negotiations if you understand one thing. The buyer and seller are natural adversaries. You as the current owner want to sell your business for as much as possible yet the buyer wants to get the best deal as possible which means the lowest price. Usually, there is a happy medium and we can meet in the middle and find a price that works for both parties.

There are essentially 3 steps to this phase:

The earnest money being paid
Completed due diligence and making the final decision
Executing the purchase and sales agreement

Typically, a business broker is going to ask for a minimum down payment or 10% of the purchase price, whichever is higher. This is held in escrow to show the buyer is serious. You don't need to worry about this, as this is the business brokers role to collect and deposit the money into a third party account.

One of the first aspects of this phase negotiating whether it is a stock or asset purchase. As mentioned earlier, it's very typical for it to be an asset purchase. You’ll need to identify what assets are included in the purchase. Typically these items are standard:

Furniture, fixtures, and equipment
Inventory
Real estate or lease assignment
Trademarks, copyright, patents or trade names
Contacts, licenses, agreements, etc.
Goodwill

You’ll typically have to agree to a covenant not to compete. This is standard and requested by all buyers.

A buyer may want you to stay on to train them for a certain period of time, usually unpaid, however, after that time is expired, there is often a consulting contract agreed upon. This way, you can reach out to the seller as needed and have their help if something arises. If the seller won’t agree to stay on and train or consult, it's usually a warning sign and a red flag. Unless there is a very good reason the buyer will usually want to know that you’ll be available to help with the transition for a period of a month or two and at least be a phone call away after that.

The most important part of this short chapter will be the buyer financing. Rarely are business sold 100% cash up front. Most have some type of seller financing involved. The seller needs to make sure that the buyer has established realistic financing terms and most traditional business lending requires either a large down payment and/or some type of seller financing.

Typically, the buyer will be using some of their own capital, some traditional bank financing, and some seller financing to purchase the business. The promissory note to the seller from the buyer is treated as a form of deferred compensation from a tax point of view. There are really 3 factors that are important regarding the promissory note.

The amount of the note
Interest of the note and over what period of time
Security of the note

The amount is negotiated based on the purchase price and the available financing the buyer has. The interest is negotiable but often tied to the prevailing best bank loan rate that is available. This is recommended since there are penalties the IRS can impose on you if they find the rate is not somewhat close to fair market. This means that they can tax the seller as if the rate was 8%, for example, rather than the 4% actually being charged on the note.

The security of the note is a touchy topic. Usually, the buyer wants to secure the note with the assets of the business and the seller wants the buyer to personal guarantee and sign the note as well as guarantees the buyer’s personal assets. Typically, the buyer is personally guaranteeing the note, however. Because the note is also using the business as collateral, if the new buyer defaults, the seller has the option to take the business back.

Closing The Deal

This is often the shortest part of the process but it's the most difficult. Someone usually gets cold feet and has second thoughts. Just be prepared for this and now its part of the process.

Here is an overview of the buyer’s responsibilities