I run a small service business that has lost money for the past two years. Revenue is real, about 400k annually, but margins are negative. I have a buyer who is paying cash and is not asking for seller financing. He knows the financials. We are close to a letter of intent. My question is whether there are things I should be careful about when selling a business that is losing money. The buyer seems to want the customer base and the equipment more than the ongoing operation. Has anyone been through something like this?
Exit Strategy
Successfully selling an unprofitable business to a cash buyer
If he knows it's unprofitable and still wants to pay cash, the main risk is usually in how the purchase agreement defines what he is actually buying. Make sure the assets list is explicit. Equipment, customer contracts, IP, phone numbers, that kind of thing. A cash buyer who is buying assets rather than equity can usually move faster. But if he is buying equity, you may be handing over liabilities you forgot about.
Two years of losses. Is there any debt on the equipment? That could complicate the closing.
There is a small equipment loan with about 18k left. I planned to pay it off at closing out of the proceeds. The buyer already knows about it.
Who drafted the LOI? If the buuyer did, read the exclusivity clause carefully. A cash buyer may want 60 or 90 days of no other negotiations while he does diligence. In a business that is losing money, that time can cost you more than the deal is worth. I would push for a shorter exclusivity perioud or none at all. Also, watch for a clause that lets him walk for any reason and you have no recourse.
Cash buyer does not always mean clean buyer. Where is the money coming from? If it is a wire from an entity nobody has heard of, your bank may ask questions. I had a closing held up for a week because the funds came from an account in a different name than the buyer.
Losing money but 400k revenue. Some buyers only want the revenue stream and the customer list. If he is buying the customer base, make sure the assignment of contracts is allowed. Many service contracts have a clause about assignment without consent. That is a real problem if you hand over customers and the buyer later cannot collect.
i sold a losing operation two years ago. It was an asset sale, cash at close. The big thing for me was taxes. The loss carryforward and how the sale is allocated matter. Talk to your accountant before you sign anything. Allocation of the purchase price between equipment, goodwill, and customer list changes wgat you owe.
Any employees? If he is keeping staff, there may be notice requirements or accrued vacation you owe at closing. Those can eat into what you think you are getting.
Four employees. Two are staying, two I will let go. The buyer is not taking on any of the payroll obligations, so I am handling that. That is already budgeted.
One more thing. If the buyer is paying cash and not asking for seller financing, he has less incentive to do deep diligence. That can cut both ways. He may close fast, or he may come back after closing and claim something was not disclosed. Get a clear mutual release and an as-is clause in the agreement. And do not sign a personal guarantee on anything.
The two employees you are letting go. Make sure they do not have customer relationships that the buyer is counting on. If they leave angry and take clients, the buyer may argue the customer base was not what was represented.
Also check the lease. If the lease is in your name and the buyer wants to take it over, the landlord has to consent. Losing a location can kill a deal at the last minute.
What is the buyer's plan for the business once he owns it? If he is planning to shut it down and keep the equipment, that is one thing. If he thinks he can turn it around, he may blame you later when it does not work. I would keep the release language broad.
The loss itself may be your best friend here. He is buying something cheap because it is not working. That means he has less room to complain about the financials.