Selling a business in Texas is the natural culmination of years of hard work and dedication. More than likely your business is a going concern (i.e., it’s operating profitably).
Therefore it could be worth more than just the total of its assets. Selling a going concern can make the sale process complicated and requires the coordination of many parts.
However, don’t let the complexity of the process keep you from cashing out on all of your hard labor. Below is a straightforward guide to help you understand how to sell a business in Texas.
What Are You Selling?
This may seem like an overly simple question, but it’s the foundation of the process. Generally, businesses are sold in one of two ways, either as an asset sale or as an ownership sale.
An asset sale is when your business sells all the assets of the business but not the entity that owns them (e.g., a corporation, limited liability company (LLC), etc.).
Business assets can take many forms but are usually grouped into two broad categories: tangible assets (e.g., inventory, office equipment, vehicles, etc.) and intangible assets (e.g., patents, contracts, licenses, etc.).
It is common for an asset sale to have a combination of both tangible and intangible assets.
An ownership sale is the sale of the entity that owns the assets. The assets remain with the entity and only the owners of the entity change. Ownership sales are accomplished through the sale of all the shares (corporation) or membership interests (LLC) of an entity.
What Is the Sale Price?
Until you have decided what you are selling (i.e., assets or ownership), you cannot accurately set a sale price.
Also, an asset sale and an ownership sale are valued differently. Either way, the sale of a going concern, whether through assets or ownership, makes valuation more complicated.
It is very common to hire a business appraiser or an accountant who specializes in selling businesses in Texas to help you determine a sale price. Setting an accurate sale price is very important because it will be scrutinized during the “due diligence” phase discussed below.
Due diligence is a pre-sale process when the buyer examines the state of your business and its operations. At the center of the due diligence process are the business’s records, tax returns, and related commercial documents.
During the due diligence process, you should expect to grant the buyer access to your business records, including accounts payable and receivable, leases, commercial contracts, customer lists, tax returns, corporate governance, etc.
Through that process, the buyer will either be satisfied with the state of the business or raise issues that need to be fixed or cause the sale price to be adjusted downward.
Prior to putting your business up for sale, make sure you have all your business documents easily accessible. A lack of documents, or missing, disorganized, or out-of-date documents, can seriously impact the value of your business and could even prevent the sale.
Buyers usually do not purchase a business through 100% cash or 100% financing. Most business purchases are a mix of cash and financing. If the financing is through a third party, like a bank, you will receive the financed portion of the purchase price at the closing from the bank.
Third-party financing usually requires a contingency clause in the sale contract conditioning the sale on the buyer securing financing. The contingency clause will include, among other considerations, timelines, buyer performance standards, and a buyer purchase exclusivity period.
On the other hand, if financing is through you (i.e., you give a loan to the buyer), then another set of considerations arise.
This type of financing is known as a purchase money loan (PML). In a PML, the buyer will give you a promissory note for part of the purchase price and pay you that amount (with interest) over time.
It is customary for a PML to require security for the buyer’s performance to pay the loan.
In an asset sale, security means a lien on some or all the assets of the business (i.e., you take the assets back if you are not paid). In an ownership sale, the ownership interests themselves are secured (i.e., you take back the shares or membership interests if you are not paid).
A PML requires several documents, including a promissory note, security agreement, and a recordable security interest statement (a/k/a a UCC-1).
The Master Sale Agreement
The master sale agreement is exactly what it sounds like. It sets out all the terms of how to sell a business in Texas.
Aside from the purchase price and what is being sold, it establishes:
- performance standards,
- agreed disclosures and representations,
- closing and closing obligations,
- important mechanisms for each party to walk away from the deal.
It is the fountainhead for all actions of the seller and buyer and dictates the additional documents needed for the sale.
A master sale agreement that is well written and comprehensive is the most important aspect of a business sale next to what is being sold and the sale price.
At closing, the buyer will deliver the purchase price to you as cash, a promissory note, or a mix of the two. In exchange, you will deliver to the buyer several documents representing the transfer of the business.
In an asset sale, you may deliver bills of sale, lease assignments, contract assignments, and vehicle and other property titles.
In an ownership sale, you will deliver a stock (corporation) or membership (LLC) transfer certificate to transfer entity ownership.
The Curley Law Firm Can Map the Sale of Your Business
The Curley Law Firm is highly experienced in all aspects of business sales. As you can see, it takes experience to identify and draft all the necessary documents to properly sell a business in Texas and protect your interests. If you are selling a business in Texas, contact us today for a consultation.