[This article is part 4 of an 8-part series covering the key elements involved in the sale of IP-based and professional services businesses. The next article in the series will be “Negotiating the Deal.”]

Introduction

As mentioned in a prior article in this series, there are a number of reasons why the owners of a Knowledge-Based Enterprise (“KBE”) would want to sell the business. But an important step in transferring a KBE is finding a willing purchaser for the business.

The purpose of this article is to discuss different ways KBE’s find potential buyers.

Types of Buyers

There are two basic types of potential buyers for a KBE: internal and external.   

Internal buyers are those who are already involved with the KBE, such as current co-owners and/or key employees.  Other Internal buyers would be the children or other relatives of the KBE owners.

A KBE owner will often seek to sell to internal buyers when they are concerned about their legacy, company culture, and/or “keeping the business in the family” (whether literally via a transfer to a family member, or figuratively through a transfer to loyal employees or co-owners).  However, the cost of achieving this goal will often be a lower sale price to the KBE owner.  

In contrast, external buyers are third parties not currently involved with the KBE or its owners.  Potential external buyers could be competitors, vendors, customers, investors or venture capitalists looking to enter a new industry through the purchase of an established company.  

Transactions with internal buyers can, at times, be simpler than dealing with external buyers, but that doesn’t mean such transactions should not be handled carefully and with attention to legal formalities.  

Regardless of an internal or external buyer, KBEs will need to ensure they are getting good value for the company, and buyers will want to know that they are getting what they paid for. Legal counsel can assist with the negotiation and execution of key transaction agreements to ensure both sides are protected.

How KBE’s Find Buyers

When a KBE owner is selling to an internal buyer, they have already identified the persons to whom they plan to sell.  However, to find external buyers the KBE owners must look outward. Common ways KBE’s find external buyers include:

• Seller Network

In addition to the internal buyers identified above, a KBE owner looking to sell the business may reach out to persons in their professional and social network. This could include vendors, customers, competitors, friends, other members of business groups, and other contacts.  Although this network could produce a solid buyer, KBEs should use care when reaching out to them, especially with respect to competitors.

•  Buyer Initiated

In some instances, a KBE owner may not have been looking to sell at all until approached by a potential buyer with an enticing offer.  This type of situation certainly jump-starts the sale process.  However, as mentioned in prior articles in this series, if the KBE hasn’t performed a pre-sale review of its assets and liabilities, the KBE owner won’t know the true value of the business, and as such risks entering into a bad deal.

•  Online Listing

KBEs may list their business for sale online through any number of listing services. These listings increase exposure to additional potential buyers, but the quantity and quality of these buyers will vary greatly from site to site.  In addition, some sites are free, while others charge hefty fees.  As such, the KBE should carefully research the potential listing services, and may need to list with several sites.  

•  Business Broker

One of the most common resources for finding external buyers is by engaging a professional business broker.  There are a number of benefits to using business brokers, but their services can be expensive.  Moreover, there is a wide range in the quality and service provided by various business brokers, so KBEs seeking to hire a business broker should evaluate several options and thoroughly investigate whomever they choose.

According to ANA Brokers, a Dallas-based business broker that only represents sellers, a professional business broker can be helpful in many ways. They can provide you with a selection of different and, in many cases, unique businesses, including many that you would not be able to find on your own. Approximately 90 percent of those who buy businesses end up with something completely different from the business that they first inquired about.

Business brokers are also an excellent source of information about small business and the business buying process. They are familiar with the market and can advise you about trends, pricing, and what is happening locally. Your business broker will handle all of the details of the business sale and will do everything possible to guide you in the right direction, including, if necessary, consulting other professionals who may be able to assist you.

The Vant Group, another business brokerage firm based in Dallas, notes that full-service business brokers can provide a range of services to KBE seller, including:

·       Consultation with seller and review of seller’s documentation

·       Review of seller’s financial statements

·       Performing a market analysis

·       Preparation of a listing agreement, seller’s disclosure, and seller file

·       Development of marketing plan and marketing package

·       Preparation & submission of advertising

·       Initial buyer response, interview, and screening

·       Business showings and buyer follow-up

·       Assisting seller with negotiation of Offer to Purchase or Letter of Intent 

·       Coordinate due diligence

·       Consultations with seller and outside advisors

·       Coordination of closing and other documentations

·       Consultation with parties regarding transfer of licenses, utilities, etc.

·       Attending the closing and subsequent transfer of the business

Brokers typically charge a percentage of the overall transaction value as their fee, some also charge separately for a few of the services listed above.  The types and amounts of these fees should be discussed with the potential broker and should be clearly stated in the listing agreement.

Choosing the right broker can result in a higher sale price, and a smooth transaction, but choosing the wrong one can be devastating. As such, a KBE should thoroughly investigate any potential brokers before choosing one.  Legal counsel and other trusted advisors can help the KBE seller identify and vet potential brokers.

 In addition, the KBE should have legal counsel review any listing agreement to ensure the terms of the deal with the broker are in the best interests of the KBE seller.

Conclusion

A KBE seller can sell to an internal or external buyer, depending on its goals and circumstances.  In many cases, a KBE seller can benefit from the services of a reputable and experienced business broker. In all situations, however, the KBE should work closely with their legal counsel to protect their interests.

 

About the Author:

Jim Chester is a 20+ year business and technology attorney, professor, and entrepreneur.  He is a recognized authority in buying and selling technology businesses, global technology transactions, and providing strategic legal counsel for innovators and industry disruptors.  For more on Jim, visit here. He may be reached at jim.chester@klemchuk.com.

To view the previous articles in this 8-part series:

1 - Transferring Intangible Assets: Playbook for Buying & Selling Knowledge-Based Enterprises

2 - Transferring Intangible Assets: Playbook for Selling a Knowledge-Based Business - Overview of the Process

3 - Transferring Intangible Assets: Playbook for Selling a Knowledge-Based Business - Preparing for the Sale

Sign up for Legal Insights blog here.  See all our content here.  

About the Firm:

Klemchuk LLP is a litigation, intellectual property, transactional, and international business law firm dedicated to protecting innovation. The firm provides tailored legal solutions to industries including software, technology, retail, real estate, consumer goods, ecommerce, telecommunications, restaurant, energy, media, and professional services. The firm focuses on serving mid-market companies seeking long-term, value-added relationships with a law firm. Learn more about experiencing law practiced differently and our local counsel practice.

The firm publishes Intellectual Property Trends (latest developments in IP law), Conversations with Innovators (interviews with thought leaders), Leaders in Law (insights from law leaders), Culture Counts (thoughts on law firm culture and business), and Legal Insights (in-depth analysis of IP, litigation, and transactional law).