8 Factors to Consider When Selling Your Small Business

Figure out what you want as you negotiate your asset purchase agreement

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I recently sold my small business. It was a validation of all the work I had put in, that I had created a business strong enough that I was able to move on and let it continue to run without me. But the sale was its own new learning experience. I had jargon to learn, regulations to observe, and an endless string of discussions and agreements to reach. Of course, an attorney is indispensable for this transaction. Even before you call your attorney, however, you should have some ideas of what you expect to face. Here are the factors I’d recommend you consider when selling your small business or microbusiness.

1. Asset purchase agreement basics

Even before you call an attorney, read the buyer’s purchase agreement offer. And yes, in most cases, it’s the buyer who sends the purchase agreement to the seller. Fortunately, I found myself working with a buyer who displayed good intentions and integrity. However, it’s critical to read and understand what’s in that agreement and — perhaps more importantly — what’s not addressed.

First, I spent time identifying all of the words I didn’t know in the context of a purchase agreement for a business. Here are just a few words I needed to look up and/or ask my attorney to define:

arbitration
expressly
goodwill
inure
license
material provision
name, image, likeness
personal property
trade dress

2. Noncompete clause

Basically, a noncomplete clause stipulates that the seller promises not to go into a similar type of business within a certain number of years (and, perhaps, in a similar locale). I had no intention of opening a similar business, but I wasn’t retiring, either.

As business litigation attorneys warn, “Noncompete agreements stemming from the sale of a business often raise complex issues for both buyer and seller.” Remember, too, that a noncompete clause is not just about starting up a new business. It’s likely to include customer lists, solicitation of existing clients, and perhaps more.

This raised a big question for me: What is a “similar” business? And what counts as “solicitation?” This became a big factor to consider when selling my small business— I didn’t want to land myself in legal trouble because of something I didn’t think might violate the noncomplete clause! To avoid confusion, I very clearly outlined a description of my current target audience and the main products/services I offer. My attorney was able to write a few lines that the seller and I could easily agree to, and we attached that description as Exhibit A.

Meanwhile, this whole noncompete issue is, as my attorney aptly stated, “a moving target.” Given the Federal Trade Commission’s April ruling on noncompetes, it’s hard to predict how or if such a clause will offer any protections or restrictions in the future.

In my case, I agreed to a 3-year noncompete, rather than the 5 years specified in the initial offer. If I were younger and less ambitious, I might have asked for a 1-year.

3. Assets

What assets would or would not be part of the agreement? The buyer presented me with an asset purchase agreement that gave a very broad “exclusion” list, consisting of a hundred words or so. I realized that left many questions about items that were not specified as either inclusions or exclusions.

Some assets to be included were obvious, for example, the online products and services, and email sequences and mailing lists to support their sales. But what about…

office furniture and equipment?
a custom-designed database code?
all or some or none of my social media accounts?
archived products or other outdated or inactive assets?
creature comforts in my office, including my large library of books, coffee maker, and wall prints?
gifts from customers or colleagues, or business-type items that were paid for with personal funds?

I took the time and trouble to list assets that were included or excluded. This task became easier when I realized that the only assets to be included had two characteristics. First, all were intangible items, and second, such assets directly supported online sales. All tangible items — servers, printers, computers and more — were on the exclusion list.

If you’re selling your small business, make sure you’re clear about what assets you do and don’t intend to include.

4. Roles and responsibilities transition services

I suggested to the buyer that we set up a transition plan. But, long story made short, we did not. As a result, we had many humps and bumps in the first few weeks that could have been avoided.

Would such a transition plan have been included in the purchase agreement? I don’t know. I didn’t think to ask my attorney. But I wish I would have. Perhaps it would have been helpful to attach a simple exhibit to the purchase agreement, outlining a few executive-level topics that could predictably create some lumps and bumps.

Is this a situation where my attorney might have been helpful? I’m not sure. I do feel sure, however, that more conversation about the transition, and more structure to guide that conversation, would have helped. After the closing, I was taken aback by how unprepared I was for the transition. I wish I’d planned better for it. I’d recommend you learn from my mistake when selling your small business.

5. Payment Method

Full payment for the sale isn’t necessarily a one-shot deal. Talk to your accountant. You may prefer having a percentage of the sale paid at closing, with the remainder to be paid in monthly installments.

The method of payment was not specified on the original offer. Fortunately, neither I nor the buyers were particularly fussy about whether the payments should be made by check, ACH, or wire transfer. But I wanted to confirm and clarify that. I once again found myself looking up definitions.

People often use the terms ACH and wire transfer as if they were synonymous. They are not; there are least seven differences. Also, you may choose one payment method for an initial lump sum, and a different method for monthly installments. Fortunately, none of these were contentious points for either me or the buyers. But I wanted to make sure I understood my options, and that we had a clear written agreement for one or the other or both.

6. Quotes, Invoices, and Purchase Orders

Outstanding quotes, invoices, and purchase orders — put simply, unfinished business — were not mentioned in the asset purchase agreement that was initially presented to me. Hence, I was eager to ask my attorney how to handle these issues.

A price quote is simply a document that specifies the price for a set of goods or services. A customer may ask your business for a quote, but that is not a promise to buy or sell. We did have an outstanding quote, and I told the buyers about it. It involved a relatively small amount of money from a customer with whom we had no history, and we had invested only a small amount of time working up a quote. Hence, I did not address this in the purchase agreement.

Invoices are a statement of services already performed, and the sum due for them. We didn’t have any outstanding invoices. If you find yourself in that situation, however, get a clear agreement about who will pocket the payment when it arrives.

Purchase orders (POs) that are outstanding definitely deserve attention. A PO obligates the buyer to pay the seller. In my experience, POs are often how government agencies or other large organizations arrange payment.

We had one purchase order, for a sizable amount, that had been sent to us a few weeks before closing. Before I talked to the attorney about this, I talked to the buyers. I explained that I anticipated a delayed payment, since this government-based customer had been fairly slow to pay in the past. I also explained that making that sale had required a substantial amount of my time, as well as time from two of my employees. I asked the buyer to agree to split in unequal portions, and to my favor. By making that verbal agreement, I was able to direct my attorney to address it in the purchase agreement.

When selling your small business, make sure identify all outstanding quotes, invoices, and purchase orders, and come to a clear agreement what is to be done about them.

7. Closing documents and contingencies

What are closing documents? Obviously, these include the purchase agreement. But expect to find other documents, such as a Bill of Sale, and a Funds Disbursement Agreement. You may find yourself needing to complete other documents, too.

I was asked to generate a list of software (including subscriptions) used in the business, and to provide the URL and passwords for each. I assumed it would be a simple 5-minute job. It wasn’t. It turned out to be many hours of work to do over many days. I honestly thought the task was to simply “list.” Instead, the buyer was asking for more than a simple list, which was not clear to me until after the deal was closed.

What about contingencies? And why would you have contingencies in an asset purchase agreement? Wouldn’t it be better to just have everything all cleaned up before the closing? Well, yes, of course. However, in certain situations, that might not be realistic. You might have an outstanding action to finish before the closing date that will take several hours or days, or something pending you are unable to execute right away. If so, it may delay closing. Interestingly, we had one major contingency which I felt was not possible to complete before the closing. Much to my surprise, the task went quickly, and we were able to close with no contingencies.

On the other hand, we ended up doing hours of tasks to help with transition of access to accounts and data, as I described above. The “list” was not mentioned as a contingency; nor was the depth of effort that we eventually encountered. However, performing those tasks was the right thing to do, so we did it. But were we contractually obligated to do so? I doubt it.

If you and the buyer agree there are no contingencies, be sure to state that in the purchase agreement. Don’t make assumptions or leave anything unstated when selling your small business.

8. What really matters?

Before you talk to your attorney, determine what really matters to you. You might consider these questions:

What do I simply need to accept? There are words or phrases in the purchase agreement that might not thrill you, but you’ll probably need to accept those. For example, it always seems to me that contracts are governed according to the laws in the state of the buyer rather than that of the seller.
What can I negotiate? For example, the buyer might not want to get rid of the noncompete clause. But you may be successful in negotiating a 5-year restriction down to 3 years. Similarly, I was willing to meet with the buyer for a few hours a week for a few months, but not for the number of hours or months specified in the original purchase agreement. About future meetings with the seller, I asked my attorney to insert such phrases as “at a mutually agreeable time” and “for a maximum of X hours per week for the first Y weeks.”
What’s a deal-breaker for me? Think about this before you talk with your attorney. Give careful thought to one point — maybe two — which are a complete deal-killer for you. I had one point where I refused to budge. I was fully prepared to walk away from the deal if I didn’t win that point. Don’t bluff. But don’t be afraid of walking away from the deal if you feel strongly about it.

Preparing to sell your small business

Selling your small business is validation, a payout, a doorway to new opportunities… and a big hassle too. I’m not an attorney so I can’t give legal advice. My advice is, take time to sort out your questions, expectations and priorities before even talking to the attorneys and other professional advisors who will be guiding you through the process. Hopefully these 8 categories give you a good jumping-off point for the bewildering array of points to consider when selling your small business!

Have you sold a business before? What experiences would you want to pass along to others starting the process?