What Should a Founder Know Before Selling a Small Business?

[0:00] hey everybody Welcome to Startup Chuck

[0:03] today uh I'm kind of in between a lot of

[0:05] projects been working lately on my

[0:08] update to my safe cracking robot so I

[0:10] thought it was a good time to talk about

[0:12] selling a business I don't know if you

[0:15] remember but long ago I used to have a

[0:17] bunch of stuff on startups while I

[0:18] recently just sold a business I thought

[0:20] I would go through it with everybody so

[0:23] that you kind of get an idea of what it

[0:24] was like to sell a business if you had

[0:26] any interest in selling one um first

[0:30] disclaimer my advice here is just my

[0:34] thoughts they are not Financial advice

[0:38] uh if you're looking at selling a

[0:39] company seek out a lawyer or uh a mentor

[0:43] or anything like that none of this is

[0:44] legally binding advice just my thoughts

[0:47] and opinions so with that in mind um let

[0:51] me discuss with you guys about me

[0:53] selling my latest LLC that I had and the

[0:57] experience that I had going through that

[1:00] so I guess uh first you want to start

[1:03] off with what type of business did you

[1:04] have did you have a SLE

[1:06] proprietorship um a C Corp ands Corp and

[1:09] LLC etc for me I had an LLC uh privately

[1:15] owned and I had a variety of partners

[1:18] that were in it with me and uh I owned

[1:22] 51% based on the agreements that I had

[1:25] with the partners we decided that we

[1:27] were going to sell the company um I did

[1:29] this in order to hopefully give give the

[1:31] companies some some more growth I'm a

[1:35] Creator I'm not the best at running a

[1:37] company and so I felt it was good to

[1:40] give the investors an exit um while I

[1:44] could still give them some profit as

[1:46] opposed to let the company continue on

[1:48] with me running it which again I am a

[1:51] Creator I am not necessarily a great

[1:55] salesperson so know what your strengths

[1:57] are and so I wanted to find somebody to

[2:01] take over the re of this company so I

[2:03] could see it continue to grow because I

[2:04] think it had great Market potential um

[2:08] so with that in mind um I started

[2:12] reaching out to business brokers now

[2:15] there's a couple ways you could do this

[2:16] you could look at finding a business

[2:18] broker which is basically somebody who

[2:19] finds somebody who wants to purchase

[2:22] your company and they manage it it's

[2:25] like a realtor basically instead of

[2:27] taking the 3% they take 10 12 five some

[2:31] amount it depends on how big your

[2:33] company is right um but they need

[2:35] usually a small amount uh a minimum fee

[2:39] to make sure that it's worth it to them

[2:41] to actually continue to go and sell it

[2:44] um however that's that may be and then

[2:47] after that they'll you know want

[2:49] Commission on top of that probably and

[2:53] so you can either go through a business

[2:56] broker uh I found mine by looking up a b

[2:59] bunch of of different business brokers

[3:00] online that were local to me and then

[3:03] meeting with a couple of them and then

[3:04] deciding who I like the best um or you

[3:08] can also go and work on selling it

[3:11] yourself so it definitely is worth

[3:14] trying to sell it yourself especially

[3:16] now that I've done it once if I would do

[3:20] it all over again I may or may not work

[3:21] with a business broker it made it really

[3:23] really easy they do all the paperwork

[3:26] they have the escrow agent they've got

[3:29] the lawyer to sign all the do or help

[3:31] create all the documents and they're all

[3:34] pretty boilerplate but protect you the

[3:37] seller which is great and uh

[3:41] essentially just you know if you don't

[3:44] know what you're doing it makes life a

[3:45] lot easier if you do know what you're

[3:47] doing you can still set up an agreement

[3:50] with a lawyer and then you can find

[3:53] another party through friends or family

[3:55] or through um local classified things

[4:00] like that now I actually didn't find the

[4:03] buyer from my company through the

[4:05] business broker I had found them through

[4:08] um actually one of my investors and so

[4:11] then I met with that party and uh

[4:15] essentially I felt like they're a good

[4:16] fit it's kind of like dating you you got

[4:20] to think about you know what is this

[4:22] person going to do to the brand that you

[4:24] spent so long creating um are they going

[4:27] to have this skill set to continue it on

[4:29] to make it grow um you know maybe you're

[4:32] just trying to get a quick Buck out of

[4:34] it and you just want to get out well

[4:36] that's fine that's different but uh most

[4:39] people I think that if they spent the

[4:40] time creating something they want it to

[4:42] continue to thrive and they want the new

[4:43] owner to feel like they're getting a

[4:46] deal and they want you personally want

[4:48] to feel like you know you're not getting

[4:50] short changed on the sale and so it's a

[4:51] tradeoff right compromise on both

[4:54] parties the price that you post your

[4:56] listing at isn't necessarily what you're

[4:59] going get right you have to negotiate

[5:02] and you may end up with um less than you

[5:05] initially had listed it for um and all

[5:09] of that can come out during the due

[5:10] diligence period where uh

[5:13] essentially you know they're going to

[5:15] want all of your information they're

[5:17] going to want your last three years of

[5:19] sales they're going to want all your

[5:21] books your uh your inventory your

[5:24] headcount Key

[5:25] Personnel um back tax returns

[5:30] everything you could imagine because it

[5:33] needs to be on the up and up you're not

[5:35] trying to pull a fast one on anybody um

[5:38] and if you lie you're could get in a lot

[5:41] of legal trouble right like if the

[5:44] company uh if the person that bought

[5:46] your company comes back later on and

[5:48] said hey it looks like you falsified

[5:50] this information they could try and Claw

[5:51] back some of the sales uh money for the

[5:54] business because it was um false uh

[5:58] information so so that's very important

[6:00] that you give true information but at

[6:03] the same time they're looking at your

[6:04] last three years of sales so this is why

[6:07] it's very popular for like startups out

[6:10] there in silic Valley or wherever to

[6:13] essentially puff up their sales numbers

[6:17] by investing in huge sales teams and

[6:21] really pushing product hard hard hard

[6:23] hard hard and then you know their sales

[6:26] might be great um and then they they

[6:29] sell the company and maybe the sales

[6:33] will continue um but it was possibly a

[6:36] large amount of sales force that was

[6:38] required to maintain that level of

[6:41] sales um or maybe they had an amazing

[6:44] salesperson right that uh decides that

[6:47] after the company sold they don't want

[6:49] to be with the company anymore so all

[6:51] those things are um not so much

[6:54] important from the sales side where

[6:56] you're selling your company but if

[6:57] you're buying a company um you know you

[7:00] can easily identify looking at that

[7:02] books uh looking at the books how many

[7:04] how much money was invested in

[7:06] advertising and in salespeople and

[7:09] things like that um to see whether or

[7:12] not you know there's a relationship

[7:14] there between very heavy into cost of

[7:17] sale um let's see here

[7:20] so if I were to do it again um I think I

[7:24] might still use a business broker but I

[7:26] would be

[7:27] more uh concerned earned or I would make

[7:30] sure that

[7:32] I twisted the contract in a way that

[7:35] better protected me the seller so for my

[7:38] example I was working with a business

[7:41] broker um they did not find the party

[7:43] that I ended up selling to I instead

[7:46] sold the company to another party that

[7:49] somebody uh one of my investors knew and

[7:53] uh because I didn't have in the contract

[7:56] that um essentially I had found the

[7:58] party then you know I might only owee

[8:01] them their minimum fee um or I could

[8:04] have the ability to cancel the contract

[8:07] with the um with the business broker

[8:11] essentially I ended up owing the

[8:13] business broker the entire fee for the

[8:15] entire uh service that they provided and

[8:18] sale even though they didn't help find

[8:21] the purchaser the buyer and so I would

[8:23] have rewarded the contract going fresh

[8:25] into it to where I could get out of the

[8:28] contract easier

[8:30] or buy out of the contract easier as

[8:32] opposed to being stuck underneath the

[8:34] business broker and having to pay their

[8:36] fee could I have tried to get out of it

[8:40] you know had I gotten a lawyer and

[8:42] whatnot yeah sure but um I never know if

[8:44] I'm going to sell a company again or buy

[8:46] a company and I don't want to ruin a

[8:48] relationship with people that you know

[8:50] it's my fault that I didn't think about

[8:53] it ahead of time because again I just

[8:54] didn't have the background and history

[8:57] and experience

[8:59] that hopefully some of you will have now

[9:01] listening to this so uh with that what

[9:04] else before you give them any of your

[9:06] books or anything like that you are

[9:09] going to sign an NDA with um anybody who

[9:14] is interested in your company you don't

[9:17] want to hand over your books to somebody

[9:19] um who might just want that information

[9:22] because they're a competitor or a friend

[9:24] of a competitor that uh would not be

[9:27] good right um

[9:30] another thing to think about is whether

[9:32] or not you know when you're you're

[9:34] discussing it with the new purchaser are

[9:36] you selling the business as a whole or

[9:39] just the assets and so if you are

[9:43] selling the

[9:45] assets that's something that a buyer

[9:47] would want to do because that can

[9:49] protect their liability in some ways

[9:52] they're not buying your LLC itself

[9:55] they're buying the assets only of the

[9:58] company they're starting up their own

[10:00] LLC they are um creating their own

[10:04] company name or waiting for you to

[10:07] change your company name and then

[10:09] re-register under your old company's

[10:11] name um even though it still says Su LLC

[10:16] and you shut down such and such

[10:18] LLC uh you can do business as the old

[10:23] name and you're still not legally that

[10:26] company um again that's my understanding

[10:30] I'm not a lawyer take that advice to a

[10:32] lawyer if you want to have you know

[10:34] better information on that

[10:37] um so a lot of companies in order to get

[10:40] out from the liability of the previous

[10:44] company they might just buy the assets

[10:46] only and then um leave The Old Company

[10:51] Alone um with the

[10:54] expressed

[10:56] expressed uh understanding and signed

[10:59] agreement that you will have a

[11:01] non-compete agreement so for example you

[11:04] know I signed a non-compete agreement

[11:06] stating that I would not make sell

[11:10] produce Etc um any of the product that

[11:13] would compete with the product of the

[11:16] company I had just sold and so as such

[11:19] you know I'm banned from doing that for

[11:21] a year um some other things that you

[11:24] might want to uh be careful about is

[11:27] reading you know the fine print on on

[11:29] the contract you want to make sure that

[11:32] in the entire contract who are they

[11:34] spelling out has a liability are they

[11:36] spelling out that the company they're

[11:39] buying from uh has the liability in the

[11:42] contract if all the information is

[11:44] incorrect things of that nature um or

[11:49] are they spelling out explicitly you as

[11:52] an individual person uh I don't think

[11:55] that any individual person necessarily

[11:57] would want to be liable

[12:00] um when the whole point of an LLC is

[12:04] to uh limit your liability right um with

[12:09] that in mind if you lie when you're

[12:13] doing this sale right if you falsify

[12:15] your books well then you're breaching

[12:18] the liability Veil like you are going to

[12:21] be liable no matter what um you know

[12:25] this is this is only for people that are

[12:28] doing everything on the up and up right

[12:31] um that's the whole point of an LLC is

[12:33] that if you do everything correctly you

[12:36] should be protected Le liia legally Etc

[12:40] um and not held personally financially

[12:43] responsible for company related issues

[12:48] unless you had gross negligence but

[12:49] again that's why everything is on the up

[12:51] and up and once more I'm not a lawyer

[12:54] talk to a lawyer about this uh if you

[12:56] want to have any sort of legal advice

[12:58] related into that see what else um okay

[13:02] so once you agree with whoever is going

[13:05] to buy your company Etc you talk with

[13:07] your business broker your lawyers or

[13:09] whatever and you've got the price and

[13:11] everything finalized then you're going

[13:13] to want to determine a closing date uh

[13:17] it needs to be uh a date in which uh the

[13:21] person who's buying the business is

[13:23] going to have all the funds available

[13:25] and in an escro account

[13:26] waiting um

[13:29] essentially a wire transfer takes a

[13:32] little while it's not like two seconds

[13:34] you know it could take three hours it

[13:36] could take a day uh but essentially

[13:40] you're going to want to agree on a

[13:41] closing date and then you are going to

[13:45] both of you confirm that the money is in

[13:47] the escro account you're going to sign

[13:49] the documents documents will be

[13:51] finalized uh you're going to sign

[13:54] documents as well uh

[13:57] stating that you know if you're changing

[14:00] the name of the company you'll sign them

[14:02] and then send them out that day to the

[14:05] county records or your state or whoever

[14:07] is stating that you're changing your

[14:09] business name and that the other company

[14:11] is changing their business name to your

[14:13] old business name Etc and then uh

[14:17] essentially once all that's done and

[14:19] you've signed all the documents and the

[14:21] money has been transferred then it it's

[14:23] their company they own it and they can

[14:27] do whatever they want with the assets or

[14:29] if you transfer the actual LLC then they

[14:33] would have that completely and then

[14:35] you're you're just pretty much done at

[14:37] that point except for a few tiny things

[14:41] so

[14:43] um you're going to have to still close

[14:49] do close the company down or um in your

[14:53] case if they bought the

[14:56] LLC uh they're going to have to handle

[14:59] the taxes on it from the transfer date

[15:02] things like that but if they didn't buy

[15:03] the

[15:04] LLC I believe that basically it's on you

[15:07] right you are going to have

[15:10] to settle all your taxes and all your

[15:13] debts and everything that occurred prior

[15:16] to that date uh it for the LLC that you

[15:20] still own it's not shut down yet and the

[15:24] other company is going to then take over

[15:26] all sales and taxes Etc moving forward

[15:28] from the that date so there's going to

[15:30] be a point for a few weeks where you've

[15:33] got orders coming in and out and sales

[15:36] coming in and out and bills for things

[15:40] that had occurred prior to the sales

[15:44] date that now have happened you know

[15:47] came in after the sales date but were

[15:49] owed for services prior to that so

[15:52] there's going to be a trup where either

[15:54] they owe you some money or you owe them

[15:56] some money and in your contract agre

[15:59] essentially you need to have that

[16:00] spelled out very clearly about how

[16:01] that's

[16:02] handled sometimes um you know that might

[16:06] be what cash in the account is left over

[16:08] for you know if you sell the business

[16:11] including the cash assets then you could

[16:14] state that the cash Assets in the um

[16:19] business's accounts bank account will

[16:22] cover you know those things but if you

[16:26] didn't sell any of your cash assets uh

[16:28] in the case of let's say an asset

[16:31] sale then again you're going to have to

[16:33] handle that true

[16:37] amount so either way that is basically

[16:41] where how it was for me

[16:46] I uh sold the company shut the LLC down

[16:51] finalized um my taxes sent those in sent

[16:55] all of my investors their tax

[16:58] information they

[17:00] k1s um any Consultants they're

[17:04] 1099s and uh did any TR up I needed to

[17:07] do with the previous

[17:09] owners um whether or not they owed me

[17:11] money or I owed them money and then

[17:15] essentially that's it oh well there's

[17:17] one more thing so you're going to have a

[17:18] training period so that'll be in your

[17:22] contract however much it is depends on

[17:25] the business the training may be no

[17:27] training you get everything and it's

[17:29] it's yours now like if you owned a a

[17:33] pretzel shop

[17:35] essentially you Pro you might train them

[17:37] you might not it's up to you someone

[17:39] could just come in and say I know how to

[17:40] run a pretzel shop I'm just buying you

[17:42] out you're done alternately like you see

[17:45] with big companies sometimes the old CEO

[17:48] will stay on for a year as part of their

[17:51] contract agreement to handle a

[17:53] transition for me I stayed on for a set

[17:57] amount of time

[17:59] um up to a period and then any more than

[18:02] that I offered to contract if necessary

[18:05] but they essentially took it over and

[18:07] they've been running it fine since then

[18:08] better than I ever would have so uh

[18:12] again made me feel good that hopefully I

[18:14] sold the company to the right person and

[18:16] they're going to continue it on and it's

[18:17] going to grow great and uh yeah so

[18:21] that's that's all I've got for selling

[18:23] your own company and kind of the

[18:25] experience that it was for me going

[18:27] through and it wasn't nearly as painful

[18:31] as I thought it would be but remember

[18:34] when you do sell that company you're

[18:37] probably going to make a profit that

[18:39] year on that money and you're going to

[18:42] end up having to pay a lot of

[18:44] taxes um so keep that in mind you you

[18:47] may find depending on how much you sold

[18:50] the company for uh it was either really

[18:53] worth it or only marginally worth it and

[18:57] you know you might just be glad to get

[18:59] your time back after you know not having

[19:01] to run the company all the time um taxes

[19:05] well I can't give any advice on that

[19:08] again talk to an accountant or a lawyer

[19:11] so hope this was useful please like And

[19:14] subscribe if you aren't already and I'll

[19:17] catch you guys next time thanks