Selling A Business? Read This First.

Selling a business? Negotiations may not be over just because the sale is finalized. Michael Ellis of Business Law Today tells us that the planning of sale absolutely has to extend beyond the close of the transaction.

Could there be disputes? Absolutely. There often are between buyers and sellers, which is why it's important you have a lawyer ready for litigation even after the ink has dried. Working capital is the biggest issue of dispute, with some cases going to trial and lasting for years with discrepancies in the millions and billions. Working capital is the biggest cause for dispute, but litigation post-sale can happen for any number of reasons including warranties & purchase price payments.

Generally, the expectation is that the buyer has enough leftover working capital to keep the business running day today as the daily requirements of small businesses are constant and do not run cold because of any given disputes on the buying side. What does it mean for your business? You should probably get clear with the buyer (or the seller) on what exactly operating costs look like on a daily basis including the cost to pay your staff, pay for equipment and inventory, rent, and anything else your business needs. Remember though that cash is usually retained by the seller, and typically isn't included in any official sale numbers.

Working capital is estimated at about 6-12 months out, but don't be confused. If your business is making 500k this year but is on target to make 2.5 million in the next year - the estimate should take that into account, and often, that projected growth model is what the working capital needs are based on. Be careful to make the estimation as close as possible - if you're the buyer - you'll end up paying the difference.

Already have employees on payroll? Be sure the costs of vacation time, sick days, and call-offs are all considered. If employee costs are not accounted for - you could end up with employees not being properly or expediently paid for off time and that could cause other problems. A lot of the time the buyer and seller are not nearly using the same metrics to measure working capital and that's one thing you'll want to get really specific about.

Re: Assets & Liabilities:

Attorney Ellis thinks its best practice to include an added exhibit to the purchase agreement as an example of working capital stating it must use the same principles as historic working costs. Generally, if there's any dispute an accountant should be brought in with neutral interests and both parties are given a few weeks to work out the kinks.