Planning to retire or sell your Texas business in the next three to four years? Learning what happens when you sell a business now can help you protect your legacy and get the best return on your investments.
Should I Sell My Assets Only or the Entire Business Entity?
Asset sales transfer tangible and/or intangible assets, like:
- Machinery, equipment, furniture, and inventory
- Contracts and intellectual property
Buyers like asset sales because the seller can’t transfer liabilities or the business entity itself. That leaves you on the hook for the business’s debts, corporate reporting requirements, state registration fees, etc.
Entity sales, on the other hand, transfer the entire business entity to the buyer:
- All tangible and intangible assets, including licenses
- All liabilities and debts
- The legal entity (e.g., corporation, LLC)
After an entity sale, you have no further responsibility for debts or the legal entity.
How Much Is My Business Worth?
A professional appraisal, conducted by an experienced and reputable firm, will give you the most accurate valuation of your business.
You can also look for recent sales of businesses like yours to get a general idea of what your business might be worth. That data isn’t always available, however, and it may not include all the information you need to make sure you’re comparing apples to apples.
At Hendershot Cowart P.C., we can identify and collaborate with an independent business valuation services firm specifically trained to perform valuations for your industry or business model. We will ensure the business valuation firm has the reputation and depth of experience to handle your situation – including experience with similarly sized companies.
There are ways to maximize the value of your business as well.
Common ways to increase and preserve the value of your business include, for example:
- Building a capable management team that can run the business independently after you leave;
- Protecting valuable intellectual property, including copyrights, trademarks, and trade secrets;
- Improving profit margins through operational improvements and cost-saving technologies;
- Maintaining clean, accurate books and records; and
- Diversifying the customer base to reduce dependency on key accounts.
Start working with an exit planning team now to discuss and implement strategies to prepare your business for sale in three to four years. A typical succession planning team may include a business attorney, wealth advisor or financial planner, and sometimes an accountant or insurance agent.
Your business attorney can help assemble and coordinate your exit planning team to help ensure your retirement or business sale goals are met.
How Do I Find the Right Buyer?
A smooth ownership transition preserves your business’s value, so your ideal buyer is someone who already knows the business. That could be a business partner, key employee, family member, or a longtime vendor.
You might also find a good fit in a similar business that serves a different market, or even a competitor — but proceed with caution. In some industries, the knowledge that you’re looking to sell could reduce your business’s value.
If you’re a franchisee, you can reach out to nearby franchisees or ask the franchise about individuals interested in buying. There are also online resources for franchisees, like frannet.com.
If you don’t find the right buyer in your existing networks, you might consider:
- Asking your CPA or attorney for contacts
- Networking within industry, trade, or professional organizations
- Working with a business broker, mergers and acquisitions advisor, or investment banker
What Happens During the Sales Process?
Most sales start with informal discussions between sellers and potential buyers. The first formal step is a non-disclosure agreement.
1. Non-Disclosure (Confidentiality) Agreement
Make sure you have a written non-disclosure agreement before you share any confidential information or trade secrets. You may also want a non-solicitation agreement to prevent buyers from recruiting your employees.
2. Letter of Intent
If both parties want to move forward, the next step is to create a letter of intent (LOI). The LOI outlines the key terms of the agreement at a high level, like purchase price and closing conditions. LOIs are not legally binding, but once you agree to the terms in the LOI, it may be difficult to re-negotiate them.
3. Due Diligence
Due diligence is an in-depth assessment of your business’s health. The seller asks for information like:
- Legal structure and ownership
- Financials, tax information, loans, and banking relationships
- Regulatory compliance details
- Real property, intellectual property, equipment, and inventory
- Business operations, insurance, and legal liabilities
- Employer-employee agreements
4. The Purchase Agreement
The purchase agreement is a roadmap for the sale. Using the information received during due diligence, it fleshes out the deal points in the LOI, and covers terms like:
- What’s included in the sale
- Price and how it will be paid
- Representations and warranties (including disclosure schedules), assumption of liabilities, covenants, restrictive covenants, indemnification, and employee matters
- Dispute resolution
- Non-disclosure, non-solicitation, and non-competition agreements
- Closing date, deliverables, and costs
Some purchase agreements include earn-out provisions, which can be a useful compromise when the buyer and seller disagree over the purchase price of the business. However, earn-out provisions are not without risk. Although every deal is different, your attorney can advise you on ways to effectively limit the risk associated with earn-outs.
Read a deep dive into purchase agreements.
5. Closing Date and Closing Conditions
Closing is when money is exchanged, and the transaction officially occurs. You and the buyer may have to meet certain conditions before closing. A common roadblock for buyers is third-party approvals, like getting your landlord to accept the buyer as a replacement tenant. If the closing conditions aren’t met by the closing date in the purchase agreement, the deal may fall through.
When Should I Start Preparing To Sell My Business?
The sooner you begin planning, the more options you’ll have. It’s common to start seeking out buyers one or two years before you plan to sell. Before that – three to four years before you plan to sell – assemble a succession planning team to help you through the process.
A Note About Selling Your Healthcare Business in Texas:
If you are a physician, other healthcare provider, or professional seeking to sell a practice or clinic, be aware that there are laws in Texas that dictate who can own a medical practice.
Texas has a prohibition against the Corporate Practice of Medicine, meaning that non-physicians cannot own a medical practice or employ physicians.
Though there are statutory exceptions that allow some non-physician individuals or entities to own a Texas medical practice, those exemptions are limited to specific situations where every requirement can be met – such as a nonprofit that’s certified by the Texas Medical Board (for physician employment), or certain hospital districts, rural hospitals, or Texas counties that provide medical care to incarcerated inmates.
Hendershot Cowart P.C. has both a healthcare and business law practice, giving our firm the unique ability to guide medical entities through transactions that comply with state and federal healthcare regulations. Our attorneys can ensure a smooth and efficient transaction, as well as alert sellers to regulatory requirements that a strictly-business law firm may not be familiar with.
Transactional Attorneys Can Help You Navigate the Sales Process
When you’re selling a business in Texas, you need the right experts at your side: accountants, attorneys, and business brokers.
Hendershot Cowart’s transactional attorneys can help you assemble your succession planning team, create a sale plan, and negotiate a purchase agreement that protects your interests and creates a seamless transition for your customers and employees, all while preserving your legacy.
