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Ways a Seller can Prepare for Closing

5 Ways a Seller can Prepare for Closing

When selling your business, there is lots of work to be done after the buyer’s due diligence has concluded, and before you reach the finish line at the closing table. Here are five ways you can prepare for your closing in advance, so that you have all your ducks in a row and that you can help to make the closing as smooth as possible. 


1. Document Processes and Procedures

Part of the reason why someone is buying an existing business rather than starting their own from scratch, is that they are getting a “well-oiled machine” by purchasing a business that has a proven track record of prior success. Most likely, your processes and procedures as to how exactly your business is run is the “secret sauce” to your business’s success. Hopefully you have already taken the time and effort to document all of these operating procedures via employee training manuals, company handbooks, or simply recording step-by-step how to carry out the operations of the business. This is one of the biggest assets a business can have, and it will make the handover to a new owner infinitely easier. 

If you haven’t done it yet, have all of your employees begin to document their role, and detail every task they are responsible for completing as part of their job. Also, you as the owner will need to document your role in the operation, and make sure to include all of the details a new owner would need to take over the reins to your business. Documentation can be a combination of written instructions, video training, etc. The idea is that anyone should be able to take the documentation and either fill one of your employee’s roles or fill your role, without any hands-on training. The documentation should be detailed, precise, and complete. 


2. Prepare for Handover with the Buyer

A few weeks before the closing of your business is scheduled to take place, sit down with the buyer to plan out and prepare for your handover or familiarization period. Decide together how you will tell the employees, clients/customers, vendors, suppliers etc. about the change in ownership. What makes the most sense for each of those different groups of people? What is the best way to make that communication smooth, in order not to disrupt any of the business’s operations? Usually communication that there is a new owner of the business doesn’t take place until the day of or day after closing, for confidentiality reasons, but one exception might be suppliers or vendors, because the new buyer might need to set up new accounts with them in advance, in order to have a seamless transition and no bumps in operation. As the seller, you know best when it comes to this, so just plan accordingly. 

In addition, you and the buyer will want to plan out how the familiarization period is going to work. In the purchase contract you will have agreed on a specific time-period for this handover. Usually it is 2 weeks, but it is negotiable. Plan out how the contracted time will play out. Will you be with the new owner from 8:00am-5:00pm Monday-Friday for 14 days? Or does it make sense to break it up into smaller chunks of time? Sort out the proper plan you need to teach the buyer how to run the business. After the familiarization period is up, the buyer should be confidently running the business, ideally without your help.  


3. Organize Work in Progress

Depending on the type of business you own, a job might get started before the business sale closing, but it won’t be finished until after closing. This scenario happens frequently in the construction industry for example, but it could even include businesses that simply have pre-paid service contracts. It wouldn’t be fair for you to retain all the deposits or pre-paid monies if the buyer will be responsible for carrying out the work or delivering the service. In the same vein, it wouldn’t be fair for you to pay for all of the materials, complete half the job, and then the buyer collects full payment once the job is complete. So, it’s important for you to identify exactly which jobs will be in progress, and then examine all of the details of those jobs, so you and the buyer will be on the same page of who is doing which work and what credits and debits will be assigned to whom, based on the details. It’s your responsibility as the seller to make a list of everything that will be in progress, and track exactly how much work has been done by you and your team, what has been paid as a deposit by the customer, and what supplies you have purchased in advance. Having all of this already sorted out before you sit down with the buyer to discuss Work in Progress will make this part of the process much more smooth. 

If there will be Work in Progress to address, then we will add a section to the purchase contract stating that buyer and seller agree to create a workflow prior to closing that outlines the jobs in progress, who will be completing which parts of the work, who will purchase the supplies/inventory needed, and how they will divide up any deposits or credits among them, based on the percentage of work done etc. Even details such as pulling permits and the closing out of said permits should be planned and accounted for. Work in Progress negotiations sometimes even result in the seller staying on with the company after closing as an employee to finish out certain jobs, and in those cases, normally an Employment Contract would be drawn up between the two parties, to outline the details, terms, and responsibilities of the seller’s new role. Once you and the buyer have come to an agreement on the credits and debits due to each party, then we would normally see the appropriate credits or debits on the closing statement, depending on what has been agreed. 


4. Make a List of Accounts Receivable

Accounts receivable aren’t normally included in a business asset sale, so make sure you have a detailed list of the Accounts Receivable that is still due to you as of the closing date. If it is possible to collect any AR before the closing, that is obviously the best-case scenario, but some customers will pay 30-90 days from the date of service, so it will be impossible to collect those in advance. However, if you know you have customers on this type of a payment schedule, make sure that you put in the appropriate amount of time in the Accounts Receivable section of the Purchase Contract. This will ensure that the buyer forwards any of these payments to you if they receive them at the business address. 


5. Get Inventory Amount Before Final Count-Up

In a typical business sale with inventory, buyer and seller will elect to do a final inventory count-up the day of or the day before closing (ideally you want to be as close to closing as possible, to have the most accurate count-up). Both parties get together to count-up all of the inventory present that will be included as part of the sale. This can be done physically or done using the inventory tools on point-of-sale systems. How the count-up is done will vary greatly from business to business, and it is ultimately up to you and the buyer as to how you decide to do it. Both parties need to agree on the amount of inventory present, and you need to make sure it matches up to the amount of inventory that was indicated in the executed Purchase Contract.

Sellers, it is important to do a preliminary count-up well before the final inventory check with the buyer present, to ensure that you will actually be in the appropriate value range as indicated on the Purchase Contract. If you will be over that amount in inventory, then it makes sense to do what you see fit to get the number down. The reverse applies as well. If you have been holding back ordering new inventory because the closing is looming, and your inventory is well below the agreed-upon amount, then you need to either order more inventory or give the buyer a credit for the missing inventory amount on the closing statement. Either way, don’t let the final inventory count-up with the buyer be the first time you are looking at the inventory value. This can create lots of problems with the buyer at closing, and you want to make sure things go as smoothly as possible, so prepare for this hurdle in advance.