Protecting your interests after selling your business

Besides asking “How much is my business worth,” the second question all owners want answered when selling their business is, “How can I protect myself so I don’t get the business back later?

In many ways, the latter question is more sensitive issue than the first.  An improperly structured transaction can create problems for the seller years after he has sold the business.  For example one Windsor owner, who had been in the home improvement business for 25 years, decided to sell.  He found a willing buyer whose enthusiasm to have his own business unfortunately exceeded his abilities to run it. 

After 18 months, the new owner decided that the rewards of owning the business weren’t worth the time or the effort and decided to walk away from his responsibilities, both of running a successful business and paying the previous owner. 

What sellers need to realize is that just like there are risks with owning their own business, there are risks with selling it.  Similarly, just like they can minimize their risks when starting a business, they can also minimize their risks when selling it.

Although there are no guarantees, a combination of the following recommendations will significantly reduce the likelihood that the seller will be stepping back into the business after stepping out.  Many of these suggestions, such as having an adequate training period for the new owner, having a good client base, having strong relationships with suppliers, etc. are obvious.  However, many are not. 

One of the most common mistakes sellers make is not getting enough of a down payment.  One of the best ways to ensure the successful transition of their business is to have the buyer invest a significant amount of their own capital in the transaction.  Few incentives inspire the new owner to achieve success greater than the risk of the loss of a significant amount of their own money.  In simple terms, it is a lot harder to walk away from a $150,000 down payment than $15,000.

Another way to minimize a seller’s risk is to know their buyer.  This goes beyond having some of the same interests, common friends and an affinity for the same brand of Cabernet.  It means a thorough review of the buyer’s credit, analysis of their personal finances and a complete resume illustrating, not only their accomplishments but their life experiences.  For example, if the buyer has a poor history of paying off his credit card, he likely might have problems making his monthly principal and interests payments to the seller on a timely basis.  If the buyer doesn’t have a strong financial statement, he may not be able to weather any unexpected slow periods. 

As far as life experiences go, the passion and skill sets that are required to run a day care will be significantly different than what would be needed to operate a light manufacturing business.  This is what happened with that Windsor home improvement business owner.  Although they shared many interests, the buyer didn’t share the seller’s passion for customer relations which was so important to the success of the company.

Another common error sellers make is having a due on sale clause in the promissory note.  In some cases, buyers find that being a business owner just isn’t what they thought it was going to be or that they can’t successfully operate the business and they just don’t want it anymore.   A smart seller will give them the opportunity to resell it to someone else who will operate it effectively.  As long as the original seller reviews and authorizes the second buyer, he can ensure that his payments will continue to be made.  Additionally, instead of having one buyer listed on the promissory note, he now has two!

Finally, securing the services of a good business broker to help the seller navigate through these issues can be good preventative medicine.  A qualified facilitator will structure the transaction to ensure that potential potholes are covered. 

By incorporating these obvious and not-so obvious suggestions, business sellers will be able to significantly increase the likelihood that they won’t have to come back into their business once they have left.

Do you have small business questions you would like answered about this article or others?  Please visit www.VRWindsor.com or call 519-903-7807. 

William Sivell is a sales representative of VR Windsor Inc., Business Brokerage; his blog appears every Tuesday.