the complete guide to selling a business 3rd (2007)

3rd edition
The Complete
Guide to Selling
a Business
by Attorney Fred S. Steingold
Nolo’s Legal Updater
We’ll send you an email whenever a new edition of this book is
published! Sign up at www.nolo.com/legalupdater.
Updates @ Nolo.com
Check www.nolo.com/update to  nd recent changes
in the law that affect the current edition of your book.
Nolo Customer Service
To make sure that this edition of the book is the most
recent one, call us at 800-728-3555 and ask one of
our friendly customer service representatives.
Or  nd out at www.nolo.com.
The law changes, but Nolo is on top of it! We offer several
ways to make sure you and your Nolo products are up to date:
always up to date
2
1
3

We believe accurate, plain-English legal information should help
you solve many of your own legal problems. But this text is not a
substitute for personalized advice from a knowledgeable lawyer.
If you want the help of a trained professional—and we’ll always
point out situations in which we think that’s a good idea—consult
an attorney licensed to practice in your state.
please note

3rd edition
The Complete
Guide to Selling
a Business
by Attorney Fred S. Steingold
THIRD EDITION SEPTEMBER 2007
Editor ILONA BRAY
Cover Design SUSAN PUTNEY
Book Design TERRI HEARSH
CD-ROM Preparation ELLEN BITTER
Production SARAH HINMAN
Proofreading ROBERT WELLS
Index NANCY BALL
Printing CONSOLIDATED PRINTERS, INC.
Steingold, Fred.
The complete guide to selling a business / by Fred S. Steingold. 3rd ed.
p. cm.
Includes bibliographical references and index.
ISBN-13: 978-1-4133-0706-1 (pbk.)
ISBN-10: 1-4133-0706-X (pbk.)
1. Small business Law and legislation United States Popular works. 2. Sale of
business enterprises Law and legislation United States Popular works. I. Title.
KF1659.Z9S762 2007
346.73'065 dc22
2007013038
Copyright © 2004, 2005, and 2007 by Nolo
ALL RIGHTS RESERVED. PRINTED IN THE U.S.A.
No part of this publication may be reproduced, stored in a retrieval system, or
transmitted in any form or by any means, electronic, mechanical, photocopying,
recording, or otherwise without the prior written permission of the publisher and the

author. Reproduction prohibitions do not apply to the forms contained in this product
when reproduced for personal use.
Quanity sales: For information on bulk purchases or corporate premium sales, please
contact the Special Sales Department. For academic sales or textbook adoptions, ask
for Academic Sales. 800-955-4775, Nolo, 950 Parker Street, Berkeley, CA 94710.
Acknowledgments
I wish to thank Emily Doskow for her superb editing of the 2nd edition.
Thanks also to:
Marcia Stewart for building a strong foundation for this book in its first
edition
Jake Warner for his many helpful contributions and unflagging
encouragement
Mark Hartley, CPA, for his analysis of tax issues
Glen J. Cooper for his insights regarding business brokers
Terri Hearsh for her production magic
André Zivkovich and the Applications Development Department for
creating the CD-ROM, and
Susan Putney for designing the great cover.
About the Author
Attorney Fred S. Steingold is an expert on business law, advising
entrepreneurs on how to start, buy, run, and sell businesses. He is the
author of Nolo’s Complete Guide to Buying a Business, Legal Guide
for Starting and Running a Small Business, and The Employer’s Legal
Handbook. His monthly column, “The Legal Advisor,” is carried by trade
publications around the country.
Introduction
Your Companion for Selling Your Business
Is is Book for You? 2
Will You Still Need to Hire Lawyers, Accountants, or Other Professionals? 4
Part 1

Overview of the Process
1
Deciding Whether—And When—To Sell
Deciding Whether or Not to Sell Can Be Agonizing 8
Do You Have a Saleable Business? 10
Working Out Problems With Your Co-Owners 15
Choosing the Best Time to Sell 17
If You Need to Leave the Business, But the Time Isn’t Right to Sell 19
Staying Involved With Your Business 20
Protecting Your Future Ability to Earn a Living 22
2
e Key Steps in Selling Your Business
Figuring Out What Your Business Is Worth 24
Preparing Your Business for Sale 25
Creating a Plan for the Future 26
Marketing Your Business 26
Negotiating the Deal: Key Sale Issues 27
Signing a Sales Agreement 28
Closing Your Sale 29
Table of Contents
3
e Key Legal Issues in Selling Your Business
Take Presale Legal Protections 32
Understand the Differences Between Selling the Business Entity
or Just Its Assets 33
Be Clear on What You’ll Sell and What You’ll Keep 36
Understand the Transfer of Intellectual Property 37
Protect Yourself Against the Buyer Failing to Make Payments 38
Assure Your Ability to Earn a Living Later: Guidelines for
Noncompete Agreements 39

Limit Your Legal Liabilities to ird Parties Once the
Business Changes Hands 40
Protect Yourself Against Unintended Liability to the Buyer 44
Comply With State and Local Laws at May Affect Your Sale 45
4
Tax Considerations When Selling Your Business
An Overview of Key Tax Issues 50
Understanding the Federal Tax Rate at Applies to Your Sale 53
Tax Issues When Selling the Business Entity 54
Selling the Assets of a Business 58
Asset Sale by a C Corporation 61
Asset Sale by an S Corporation 64
Asset Sale by a Sole Proprietorship or Single-Member LLC 65
Asset Sale by a Partnership or Multimember LLC 66
Allocation of the Purchase Price 66
5
Putting a Price on Your Business
ere’s No Universal Pricing Formula: Many Factors Affect Price 76
Sales of Comparable Businesses 78
e Income Valuation Approach 79
e Asset-Based Approach 80
Industry Formulas and Rules of umb 82
How Appraisers and Other Experts Can Help You Set the Price 83
Putting It All Together to Price Your Business 84
6
Working With Lawyers, Accountants, and Brokers
Lawyers 89
Accountants 93
Business Brokers 95
Part 2

Getting Ready to Sell
7
Preparing Your Business for Sale
Make Your Business Attractive to Buyers 105
Get Your Paperwork in Order 112
Show How Profitable Your Business Really Is: Restate Your
Profit and Loss Statement 119
Take Steps to Improve Business Profitability 121
Add Value to Your Lease 125
Communicate With Employees About the Sale 127
Clean Up Existing Problems 128
Nail Down Vital Relationships With Customers and Suppliers 133
Prepare a Checklist of Presale Tasks 134
8
Finding the Right Buyer
First, Look for Buyers Close to Home 139
Strategic Buyers 144
Special Concerns When Approaching Competitors 149
Marketing Your Business by Word of Mouth 150
Marketing Your Business rough Advertising 151
How Business Brokers Can Help Find Buyers 156
How to Quickly Size Up Prospects 157
9
Structuring the Sale
Asset Sale vs. Entity Sale 163
Lump Sum Payment vs. Installments 170
How to Structure an Installment Sale 171
Ten Strategies to Protect Yourself in an Installment Sale 173
Doing Future Work for the Business 180
Restrictions on What You Do Next: Noncompete Agreements 185

e Future of Key Employees 187
Keeping the Buyer Motivated 189
10
e Investigation Stage:
How Sellers and Buyers Check Each Other Out
e Buyer’s Investigation of Your Business 193
Honesty Is the Best Policy: e Importance of Full Disclosure 195
Business Information the Buyer Will Want to See 196
Protecting Sensitive Information With a Confidentiality Agreement 212
Why and How You Should Check Out the Buyer 216
Practical Steps for Evaluating a Buyer 218
11
Drafting a Letter of Intent
Why Use a Letter of Intent? 224
What to Put in Your Letter of Intent 225
Why You Should Only Sign a Nonbinding Letter of Intent 227
Format for a Letter of Intent 227
Part 3
Preparing the Sales Agreement
12
Preparing the Sales Agreement and Other Legal Documents
Overview of Your Sales Agreement 238
Related Legal Documents 243
Well-Drafted Documents Are Crucial 244
Preparing Your Sales Agreement and Related Legal Documents 245
How to Prepare Attachments to Your Sales Agreement 247
Steps in Finalizing Your Sales Agreement and Other Documents 248
Amending Your Sales Agreement 249
13
Who’s Selling, Who’s Buying—And What’s Being Sold

Naming the Parties 254
Identifying Your Business and What You’re Selling in an Asset Sale 258
Identifying the Business and What You’re Selling in an Entity Sale 264
14
e Sales Price and Terms of Payment
Sale Price: Asset Sale 268
Inventory: Asset Sale 273
Dealing With the Purchase of Accounts Receivable: Asset Sale 275
Sale Price: Entity Sale 277
Deposit 278
Payment at Closing 279
Promissory Note 281
Security for Future Payment: Asset Sale 283
Security for Future Payment: Entity Sale 284
15
Dealing With Liabilities and Representations
Liabilities in an Asset Sale 289
Liabilities in an Entity Sale 293
Representations: What ey Are and Why ey Matter 294
Seller’s Representations 295
Buyer’s Representations 300
16
Payments for Noncompete and Consultant Deals
Agreeing Not to Compete With the Business After the Sale 302
Agreeing to Work for the Business After the Sale 305
17
Other Important Legal Language
for the Sales Agreement
Contingency Clause 308
Closing Arrangements 309

Dispute Resolution Clause 312
Technical Contract Clauses 314
Additional Optional Clauses 318
18
Signatures on a Sales Agreement
Required Signatures for Sole Proprietors on a Sales Agreement 320
Required Signatures for an Entity on a Sales Agreement 321
A Spouse’s Signature on the Sales Agreement 323
Signature Clause in a Sales Agreement 325
Typical Formats for Signing a Sales Agreement 326
Accepting Personal Responsibility for Commitments in a Sales Agreement 329
Signing the Sales Agreement 332
Part 4
Preparing the Promissory Note
and Other Sales Documents
19
Promissory Notes and Other Installment Documents
e Promissory Note 338
e Security Agreement 348
e UCC Financing Statement 354
Escrow Agreement for Entity Sale 360
20
Bill of Sale, Lease Assignment, and Other
Documents for Transferring Your Business
Bill of Sale: Asset Sale 371
Bulk Sales Compliance 376
Assignment of Lease: Asset Sale 380
Assignment of Other Contracts: Asset Sale 381
Assignment of Intellectual Property 388
Approval of Entity’s Sale of Assets 389

Transferring Your Entity 391
Assignments in an Entity Sale 395
21
Documents for Noncompete
and Future Work Commitments
Covenant Not to Compete 398
Contract for Employment 404
Contract for an Independent Contractor 407
Part 5
Closing the Deal
22
Preparing for a Smooth Closing
Where and When to Hold the Closing and Who Should Attend 416
Documents for Transferring Assets 418
Documents for Transferring an Entity 420
Handling Last-Minute Problems 420
Moving On 422
Appendixes
A
How to Use the CD-ROM
Installing the Form Files Onto Your Computer 424
Using the Word Processing Files to Create Documents 425
Using Government Forms 427
List of Forms on the CD-ROM 429
B
Sample Sales Agreements
Sample #1 Asset Sale of a Restaurant by One Sole Proprietor
to Another 432
Sample #2 Entity Sale of a Bookstore by the Two Shareholders
to an Individual 440

Sample #3 Asset Sale of a Landscaping Business by a Single-Owner
LLC to a Partnership 447
Index

Is is Book for You? 2
Will You Still Need to Hire Lawyers, Accountants, or Other Professionals? 4
Your Companion
for Selling Your Business
I
INTRODUCTION
2
|
THE COMPLETE GUIDE TO SELLING A BUSINESS
T
hrough hard work, ingenuity, and
possibly a bit of good luck, you’ve
built a viable business. Now, you’re
ready to sell—or at least you’re thinking
about it. But the process may seem intimi-
dating, and you probably have lots of legal
and financial questions. Whether you want
to handle the whole sale yourself or work
with lawyers, accountants, and other pro-
fessionals, this book can help. It provides
step-by-step guidance to do it right—from
marketing and positioning your company in
preparation for the sale to negotiating the
best deal.
Each year, some 750,000 American
businesses change ownership. Most of these

are small and mid-sized businesses: retail
stores, beauty salons, quick-print shops,
restaurants, tax preparation services,
landscapers, electrical contracting firms,
and modest manufacturing operations—to
mention just a few.
No matter what kind of business you
own—a professional services company, a
neighborhood bagel shop, or a home-based
website that sells imported garden tools—
there’s likely to be a buyer out there looking
for a business like yours. But finding the
right buyer and selling the business on
favorable terms will require both planning
and hard work. This book will help you get
the job done with a minimum of hassles,
worries, and expenses. It provides step-by-
step guidance, checklists, and all the forms
you need, from the day you first consider
selling to the closing. Using this book, you
can sell your business to a reliable buyer
at a favorable price—and protect yourself
legally and financially.
Is is Book for You?
This book focuses on the sale of small to
mid-sized businesses. Though much of
what you learn here will also be applicable
to selling larger enterprises, this book
definitely is not concerned with the sorts
of mergers and acquisitions that you read

about in The Wall Street Journal. It can help
you if you fit this profile:
•Youhaveabusinessthatmightsellfor
tens of thousands of dollars or even
several hundred thousand dollars, but
probably not more than $2 million.
•Youownthebusinessyourselforwith
one, two, or a handful of others.
•Yourbusinessissetupasasolepro-
prietorship, partnership, corporation,
or limited liability company (LLC).
•Youwanttosellyourbusiness—not
merge with the buyer’s business
and keep a long-term role in its
management (although you may work
as a consultant for a short transition
period).
Does this sound like your business?
If it does, then this book has exactly the
information you need to move forward with
a smooth and profitable sale.
INTRODUCTION
|
YOUR COMPANION FOR SELLING YOUR BUSINESS
|
3
Chapter Number What You’ll Learn
Part 1 (Chapters 1-6) How to:
• decidewhetherornottosell
• timeyoursale

• prepareforthepracticalandlegalstepsinvolvedinselling
• analyzethetaxconsequences
• setarealisticpricerange,and
• chooseandworkwithlawyers,accountants,andother
professionals.
Part 2 (Chapters 7-11) How to:
• prepareyourbusinessforsale
• createamarketingplandesignedtoattractnanciallysound
buyers
• negotiateforthebestpossiblepriceandterms
• legallystructureyoursale
• putlegalprotectionsinplacetohelpassureyougetpaidinfull
• investigatethebuyer’scredentials,and
• draftaletterofintent.
Part 3 (Chapters 12-18) How to put together a sales agreement, including:
• howthebuyerwillpay(lumpsumversusinstallmentpayments)
• whichbusinessliabilitiesyou’llberesponsiblefor
• yourpromise(ifany)nottocompeteafterthesale,and
• youracceptance(ifany)ofalimited-termemploymentor
consulting deal.
Part 4 (Chapters 19-21) How to create other needed sale documents, such as a:
• billofsale
• promissorynote
• securityagreement,and
• covenantnottocompete.
Part 5 (Chapter 22) How to conduct a smooth closing.
4
|
THE COMPLETE GUIDE TO SELLING A BUSINESS
Will You Still Need to Hire

Lawyers, Accountants, or
Other Professionals?
Selling a business for top dollar may not
seem like a job you want to tackle all on
your own. But, fortunately, the process can
be broken down into small pieces, each of
which you can understand and master. With
this book, you should be able to handle
much of the work yourself. And if you
call in a lawyer, accountant, appraiser, or
business broker as needed, you’ll be able to
explain just what you need and why.
This book will alert you to specific
situations in which you’re likely to benefit
from professional help. For example,
because your business and the deal you
strike with the buyer are unique, it’s a good
idea to have a lawyer review your sales
agreement before you sign it. Similarly,
although this book provides a lot of
information about the tax laws, analyzing
your individual tax exposure is a task best
left to an experienced expert such as a CPA
after you’ve reviewed the tax material here.
By doing much of the work yourself,
the fees you pay for professional services
should be far lower than what you’d pay if
you used experts to handle the entire sale
of your business. In fact, you stand to save
thousands of dollars. Once you firmly grasp

every step of the sale process, you can act
as a knowledgeable general contractor, with
your professional advisers serving as your
cost-efficient subcontractors. This book will
help you along that path.
●
Overview of the Process
1
PART

Deciding Whether or Not to Sell Can Be Agonizing 8
Do You Have a Saleable Business? 10
Factors at Make a Business Saleable 11
Factors at Make a Business Hard to Sell 13
Working Out Problems With Your Co-Owners 15
e Value of Buy-Sell Agreements 15
How Mediation Can Help Resolve Disputes With Co-Owners 16
Choosing the Best Time to Sell 17
Business Cycles 17
Changes in the Neighborhood 18
Interest Rates 18
Industry Trends 18
e Health of Your Business 19
If You Need to Leave the Business, But the Time Isn’t Right to Sell 19
Staying Involved With Your Business 20
e Buyer May Want You to Stay 21
ere Are Many Legal Routes to Staying Involved 21
Protecting Your Future Ability to Earn a Living 22
Deciding Whether—And When—To Sell
1

CHAPTER
8
|
THE COMPLETE GUIDE TO SELLING A BUSINESS
FAST TRACK
If you’ve already decided to sell your
business, you’re probably anxious to get on with
the job. at’s fine. Skim or skip this chapter and
move on to Chapter 2.
L
ike many other entrepreneurs, you
may be ambivalent about giving up
your business. For a variety of family,
economic, and emotional reasons, you may
be trying to sort out whether it makes more
sense to sell now or to soldier on for a few
years and sell later. Hopefully, by explaining
exactly what’s involved in the sales process,
this book will help you decide.
Pace yourself. Few businesses are sold
overnight, and when they are, they’re
commonly sold for too little. In fact, the
process of preparing and selling a business
for top dollar to a reliable buyer may take
two or three years to complete. It follows
that even if you decide not to pull the sales
trigger for a few years yet, you may be wise
to begin now to get your business ready.
Deciding Whether or Not
to Sell Can Be Agonizing

As you go through the decision-making
process, you may be surprised to discover
that in addition to monetary concerns,
selling a business almost always involves
an array of personal considerations. It’s
perfectly normal if part of you wants to sell
while another part is not so sure. And, of
course, there may be other decision makers
in the picture: Co-owners, family members,
investors, and key employees may also
weigh in on whether it’s a good time to sell.
For example, if your long-time co-owner is
moving to Barcelona and wants to sell now,
you may have little choice but to agree.
Or poor health may dictate that you find a
buyer as soon as possible.
But let’s assume for a moment that
your sale is largely discretionary. Even if
selling your business now makes excellent
economic sense, emotional ties to your
work may gently nudge you in the direction
of holding on. Despite the many headaches
and frustrations that go with owning a
business, chances are you’ll have personally
identified with it in profound ways that can
make you hesitate when you consider life
without it.
Think of it this way: For years, you’ve
been creatively solving problems in a world
filled with action. On good days, running

your business is stimulating and, on the
best days, you experience a heady rush of
adrenaline. You’d be less than human if you
didn’t wonder sometimes about whether,
after selling your business, you’ll mourn
the loss of these exciting feelings and
not know how to replace them. If you’re
contemplating retirement, your ambivalence
may be especially pronounced.
CHAPTER 1
|
DECIDING WHETHERAND WHENTO SELL
|
9
Sometimes It’s Not All or Nothing
Although this book focuses on the sale of an
entire business, that’s not the only way to
get a large chunk of cash out of the business
you’ve built. Sometimes it’s possible to sell a
part of a business and keep the rest. at’s
particularly feasible when a business has
multiple functions. en, you can continue
to enjoy the action but direct your time and
energies to the part of the business that you
enjoy most—or that you believe is the most
profitable. e key to executing this strategy
is usually to divide your business in a way that
attracts potential buyers to the bits you plan
to sell, while retaining at least the seeds of a
successful new enterprise. And, of course, you

need to convince the buyer that you won’t
use the portion of the business you keep as a
springboard from which to re-create a business
that directly competes with the one you sold.
EXAMPLE: Joe owns Today’s Kitchen Inc.,
an upscale shop that sells and installs
stylish imported kitchen cabinetry. His
company also creates custom kitchen
plans—including recommendations for
elegant counter tops and top-of-the-line
appliances. And if the customer wishes,
Today’s Kitchen will provide a skilled
construction crew to install everything. As
the business and his profits have grown,
Joe has become increasingly disenchanted
with the installation part of the business.
Not only can some customers be
impossibly nitpicky, but the day-to-
day hassles of installation take Joe
away from his real love, drawing
kitchen layout plans and building the
fine custom cabinetry to fit them.
As a result, he decides to sell the
installation part of the business to
Lyle, a master carpenter who enjoys
working on-site with homeowners
(evenfussyones).
ey arrange for Lyle to have an
office and shop within Joe’s business
space so that Joe can handily refer

customers to a skillful and reliable
contractor, and Lyle can count on
a steady stream of referral business.
Lyle agrees to pay Joe $30,000 for
theinstallationbusiness(payablein
installmentsoverathree-yearperiod),
plus 10% of Lyle’s net profits for each
of the next three years. Lyle also
agrees to pay a modest monthly rent
to Joe for the office and shop space
he’ll occupy. As part of the deal, Lyle
getstotakeover(andearnmoney
from)severalinstallationscurrently
in progress and ten that are about to
begin. Joe agrees that he’ll be available
to consult with Lyle about any on-the-
job design issues that arise. Finally, the
two agree that for three years Joe will
not reenter the installation business.