A good business broker will help you prepare, market, qualify, and negotiate your business. A good lawyer will help both you and the broker address any and all legal issues to protect you and your business. Here are some of the many legal obligations and protections to consider.
Preparing Your Business
Make sure legal agreements are in writing and signed. These agreements may be between you and your suppliers, you and your employees, you and your landlord, etc.
Determine The Type of Sale
Consider if the sale is an asset sale or a stock sale and know the benefits and drawbacks associated with that type of sale. These benefits and drawbacks relate to taxes, liabilities, employee retention, and asset retention.
A nondisclosure agreement (NDA) protects the seller by requiring that the seller’s disclosed information with be held in confidence. Sometimes, this agreement will include a provision that prevents a potential buyer from recruiting a seller’s employees for a period of time should a deal to buy the business not happen.
Letter of Intent
A letter of intent is prepared by the lawyer after the fundamental terms have been agreed upon by the buyer and seller. It provides written documentation as to the terms of the agreement and may root out other potential issues. It is significant as it insures a meeting of the minds between buyer and seller as to the business terms.
The letter of intent typically includes the type of purchase, approximate list of assets and liabilities, purchase price, closing information, confidentiality provisions, rights of inspection, and other specific requests from the buyer or seller.
There are two types of Letter of Intents, binding and non-binding. A binding agreement carries greater obligation for the parties to complete the purchase and is written with greater detail as to the terms and conditions.
As a seller, you have the most leverage before signing the Letter of Intent. The buyer has almost all of the leverage after the document is signed. After the Letter of Intent is signed, the process of due diligence begins, and the business is reviewed in more detail by the buyer. It is often during this time that a Purchase Agreement is prepared by the buyer’s lawyer.
The purchase agreement will contain all the terms and conditions of the sale. It includes statements and warranties from the seller as to the status of inventory, equipment, suppliers, customers, contracts, leases, finances, taxes, lawsuits, etc. The status of the assets will be addressed, to make sure they are free from third party claims. Ownership of shares of the corporation by the seller, if the corporation operates the business, will also be addressed.
The lawyers for both the seller and the buyer will make sure both parties comply with all the statutes, licensing, etc. associated with the sale of the business.
What happens to the employees depends on the type of sale, stock or asset. In an asset sale, the seller must fulfill certain obligations regarding its employees if the buyer does not want to continue employing them after the closing. These obligations relate to giving notice, payment in lieu of notice, union membership, and long term contracts.
Seller Role in Transition and Non-Compete Clauses
If it is agreed that the seller will stay on for a period of time to help with the transition of ownership, make sure the terms of employment for the seller are worked out prior to the closing. If the seller does not stay on, reasonable and enforceable non-competition, non-solicitation, and non-disclosure clauses may need to be implemented.
Searches, Clearances, Documentation
A variety of searches will be performed including searches for liens, bankruptcy, and lawsuits. Sales tax clearance in an asset sale will be required. Third-party consent and business relationship documentation from landlords, suppliers, etc. may also be required in an asset sale. Minute book inspection in a stock sale will likely be requested. Other supporting documentation, such as transfer and assignment documents, will also be required. Negotiations will take place between the lawyers representing both parties, as needed, to ensure proper and legal transfer. Being aware of the legal aspects of selling a business will help bring the transaction to a successful close.
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