Based on my observations while representing business sellers, particularly those sellers who have not previously sold a business, a common perception is that the sale of the business will be like any other business transaction. It is not.

Business owners often believe that once a price is agreed, the lawyers can “paper it up” and, at closing, they will be out—with no further liability. Instead, the process is much more involved. Among the reasons a business sale is not like any other business transaction are:

  • The purchaser is not buying the seller’s product or service, it is buying cash flow or prospective cash flow. The buyer must understand the sources of revenues, the expenses and the risks to the continuation or improvement in the cash flow.
  • To understand the business, the buyer engages in a due diligence process. Not only are the financial records reviewed, but all aspects of the business are reviewed. The process is intrusive.
  • Due diligence review not only helps the buyer understand the business, it: (i) provides a list of items which must be corrected prior to closing; (ii) provides a specific list of items for which the seller must indemnify the buyer.
  • A due diligence review may give the buyer confidence that the business was well run or the opposite—that there are risks because corners were cut or not finalized. Such a review may cause the buyer to be confident in the purchase, renegotiate the deal terms, or elect not to purchase the business.
  • Unlike most business deals, the sale of a business involves representations of the seller about the business. For example, a common representation is that the business “complied with all laws”. Most sellers react normally and express that this is impossible to know. Generally, the representations will stay in place. The purpose of representations is to allocate risk. If, in this example, the business did not comply with laws, and it caused the business, after closing, to incur expenses, the representation would be breached and the buyer would have a claim against the seller for those amounts.
  • For the seller, the risk of indemnifying the buyer should be limited in amount, time and scope. The nature and extent of the indemnification is not generally part of a “normal business deal."

The sale of a business is not a normal business deal. Having an experienced team of advisors is vital in going through the process.

Scott Anderson