4 Things To Do Before Selling Your Own Business
In this episode breakdown, Pankaj Raval and Sahil Chaudry unpack what really happens between a signed offer and a funded closing when you sell a business. Working from a hypothetical $5 million letter of intent (the written offer that opens a deal), they trace how diligence findings, an earnout, and an escrow holdback shrink the cash wired on closing day to about $3 million.
Through this practical analysis, Pankaj and Sahil extract critical lessons on diligence, valuation, and deal structure, that apply directly to founders and leaders of growing private enterprises preparing for an eventual sale.
This podcast is for informational purposes only and does not constitute legal advice.
Takeaways
- Getting Your House in Order: After a letter of intent is signed, the buyer’s team requests every contract, corporate record, and employee agreement for a virtual data room (a secure online folder used in due diligence, the buyer’s investigation of the business). Gaps like an undocumented equity promise or unsigned board consents make buyers wonder what else is missing. Pankaj explains that work by an independent contractor is not automatically owned by the company that paid for it, which is why contractor agreements need present assignment language such as “hereby assigns.”
- Making Your Numbers Survive a Skeptic: Buyers typically commission a quality of earnings report, or QOE, which rebuilds EBITDA (earnings before interest, taxes, depreciation, and amortization) to show what the business earns on a repeatable basis. Because price is a multiple of that number, every rejected add-back (an expense the seller says won’t continue under new ownership) is multiplied at the closing table. Pankaj and Sahil also flag two tax issues a QOE can surface: personal expenses run through the company, and uncollected sales tax following the Supreme Court’s 2018 Wayfair decision.
- Closing the Open Loops: Unresolved disputes tend to get priced at the worst case, usually through escrow (part of the price held back after closing). Sahil explains that representations and warranties insurance is built for surprises, while known issues usually get a special indemnity, a specific seller promise to cover that one problem. Contracts that require consent to assign, or that carry a change of control clause, can also give a major customer a say in the sale.
- Making Yourself Replaceable: When customer relationships and approvals run through the owner, buyers commonly move price into contingent structures such as earnouts (payments tied to post-closing performance), seller notes, rollover equity, or a transition employment agreement. Sahil cites figures suggesting only about one in five earnout dollars actually gets paid, in part because the buyer controls the business after closing. A real second layer of management, delegated authority on paper, and relationships moved to the team can reduce how much of the price depends on the owner.
Soundbites
- “So every dollar they don’t believe you costs you five.”
- “Insurance is for what nobody knew. For what everybody knows, the buyer asks you to stand behind it.”
- “At forty percent, they’re not buying your company, they’re buying your relationship with one customer and hoping that it transfers.”
- “The less the business needs you before the sale, the less of your price depends on you after it.”
Keywords
Selling a Business, Letter of Intent, Due Diligence, Quality of Earnings, Add-Backs, Earnouts, Escrow, Representations and Warranties Insurance, IP Assignment, Customer Concentration
🔗 Learn More
Website: carbonlg.com
Connect with Pankaj: https://www.linkedin.com/in/pankaj-raval/
Connect with Sahil: https://www.linkedin.com/in/sahil-chaudry-6047305/
Carbon Law Group's links: https://linktr.ee/carbonlawgroup
Carbon Law Group's links: https://linktr.ee/carbonlawgroup
