Almost There – Preparing for the Closing

Here is a summary of essential actions you and the buyer should take before the closing:

  • Allocation of the Purchase Price: You will both need to agree on the allocation of the purchase price as early in the process as possible to eliminate any delays due to disagreements regarding how the price is allocated.
  • Calculate Work in Progress: You should both prepare a spreadsheet to calculate work in progress so it can be prorated at closing.
  • Equipment Inspection: Plan to inspect the equipment with the buyer well before the closing to eliminate last-minute surprises. This will allow you ample time to repair or replace any equipment, if necessary.
  • Preliminary Inventory Count: You also want to conduct a preliminary inventory count with the buyer as early in the process as possible to prevent any confusion. 
  • Seller’s Entity: Check the status of your entity to ensure it’s in good standing. The closing can’t occur or can be significantly delayed if the seller’s entity is not in good standing.
  • Tax Clearances: You will need to obtain the following tax clearances before the closing:
    • Payroll Tax Clearance: Ensures that your payroll taxes are paid and current before closing.
    • Sales Tax Clearance: If the business collects sales tax, you must obtain a clearance certificate prior to the closing. Failure to do so could expose the buyer to unpaid taxes.
    • Other Tax Clearance Certificates: Clearance may often be required from other state agencies for other taxes.
  • Third Parties: You will need to obtain closing documentation and approval in the following areas, where applicable:
    • Financing Approval: If third-party financing is involved, multiple additional documents must often be completed, such as business plans, projections, and others. Many third-party lenders also require that escrow conduct the closing.
    • Franchisor Approval: The franchisor must approve the sale, if applicable, and the buyer must usually attend training and sign the franchise agreement before the closing.
    • Lease Assignment: If the landlord must approve a transfer of the lease, I recommend contacting the landlord as early in the process as possible to eliminate potential surprises.

Following are tips to help ensure a successful closing:

  • Expect Last-Minute Problems: The sale or purchase of a business never goes as smoothly as expected. Problems often remain even after the closing. For this reason, it’s best that you and the buyer maintain an excellent working relationship so you can easily cooperate to solve any problems.
  • Keep Agreements Simple: Legal documents that are simple, direct, and straight to the point are more easily understood and are more likely to be useful. If the documents and sales process are easy to understand, problems are avoided, and litigation is less likely to occur. The faster the transaction, the lower the transaction costs for all parties involved. The plainer the document, the less chance of misunderstanding or misinterpretation and the less chance of any future conflict or recrimination. In the unfortunate event a document needs to undergo litigation, a court, jury, or arbitrator can comprehend the document more quickly. The faster they understand its meaning, the faster the proceeding and the lower the legal costs. 

Prepare Emotionally for the Closing

You’ve heard of buyer’s remorse and maybe even experienced it. Buyer’s remorse is a feeling of regret after making a purchase. It only stands to reason that seller’s remorse is a thing, too.

Some business owners become stressed before the closing as the personal implications of the sale of their business start to sink in. They often delay the sale or even back out entirely. This may be due to anxiety at the thought of major life changes after devoting so much time to their business.

After being business owners for years, many owners are initially relieved to retire. They may have dreams of traveling, spending time with grandchildren, fishing, reading, learning a new hobby, and every other kind of cliché retirement activity you can imagine. And, in theory, this is a great plan. You have worked hard all your life; now it’s time to slow down and relax.

A year or less into retirement, most entrepreneurs end up looking for something else to do with their time. Many sellers even return with a desire to play a role in their former business. This is an ideal opportunity for the buyer. A savvy buyer will sit down with you and ask what areas of the business you most enjoy working on, then align your interests with the activities that provide the most value to your former business.

Often, your emotional needs are just as important as your financial needs. Keep this in mind during the transaction and discuss strategies with the buyer to ensure your needs are met.

While I can’t write prescriptions for Valium, I can offer sound and drug-free advice on how to deal with the anxieties associated with the selling of a business …

Often, your emotional needs are just as important as your financial needs. Keep this in mind during the transaction.

Find a New Passion

As I discuss the details of finalizing the sale, I have had several clients ask, “Now, what?” Then, when the sale is completed, and they are officially “retired,” they go off to do all the glorious things they imagined. The hitch is that most will not spend the rest of their lives traveling or playing with the grandkids.

Most entrepreneurs are go-getters. They need something to do with their time, be it a hobby, a new job, a role in a charitable organization, or something that will give them a purpose. Once their business is sold, some entrepreneurs find that what they once thought would be their dream of retirement turns out to be the very thing they resent. A year or so into retirement, many of our clients even come back and ask to play a role in their old business.

Another issue is that some entrepreneurs become so stressed during the closing – when they realize they’ll have nothing to do once the business sells – that they often delay the sale or back out entirely. This is because of the anxiety they get at the thought of doing “nothing” after a lifetime of work.

Luckily, there are ways to calm your nerves when selling your business. You need to realize that what happens after you sell your business needs to be planned just as much as the sale itself. You wouldn’t sell your house without knowing where you’d be moving next. The same principle applies here: Why would you sell your business without having a detailed plan about what you will do next? Answering “I will be retired” isn’t enough. You need to direct your energy toward a new passion.

If you’re preparing to sell your business and aren’t sure what you will do next, or you plan to just retire, I challenge you to spend some time answering this question: “What do I want to accomplish over the next 5, 10, or 15 years?”

The more detailed your plan for after the business sells, the better. Writing down your short-term goals, such as traveling or visiting family, as well as your long-term goals, such as learning a new language or starting a not-for-profit undertaking, will help you feel less overwhelmed as you get closer to selling your business. You can even gather information now about the different things you’d like to accomplish once your business is sold. You’ll find that a little preparation now will save you stress and anxiety about your future as you navigate through the complex process of selling your business.

Align Your Interests With the Buyer’s 

Your interests may provide enormous ongoing value to the business, such as recruiting, sales, marketing, or establishing key alliances. These are often difficult positions to recruit for. But, you may be talented at one or more of these roles and willing to continue to perform these for the buyer, especially if your other needs are met. 

Sellers are sometimes willing to continue to work in these positions if the role is structured to align with their lifestyle. Most retirees desire flexibility, and if a buyer can offer this to you, you may develop a win-win situation. Structuring an arrangement like this can also help the buyer retain key customers or employees. Key partners will feel more comfortable if they observe your ongoing participation in the business.

Key Points

  • Selling a business is an emotional shock to some people. It may have been a part of your life for so long that you feel empty afterward. Be prepared to deal with the loss.
  • You will find that a little preparation now will save you stress and anxiety about your future as you navigate the complex process of selling your business.

Next up: The purchase agreement.