7 Legal Mistakes When Selling A Small Business

Nobody wants to face legal challenges, be it in their business or personal life. A legal battle is costly and time-consuming. Meanwhile, selling a small business isn’t as easy as you may think. You can make several mistakes, thus making it hard to get full the value of your business.

Fortunately, most of those mistakes can easily be avoided if you analyze all the relevant legal matters related to the sale of your small business. With a bit of information about legal mistakes and how to avoid them, you may find the process of selling a business to be quick and simple.

This article will look at some vital legal points you should keep in mind before putting your business on sale. But before that, you need to ask yourself why you want to sell your business.

Reasons For Selling A Business

There are two major types of business owners depending on how they let go of their company. The first type leaves their business to their family or beneficiaries. The other sells off their business to other people.

While it might be a good idea to leave your business to one of your beneficiaries, most of the time, it doesn’t work out well. What if your beneficiaries have no interest in business? What if they don’t have good management skills? That’s why you’re often better off selling your business and moving on.

Here are some of the reasons you might want to sell your business:

New Opportunities

In the modern entrepreneurial world, many business opportunities come up every day. Even if your current business is doing well right now, you might want to venture into another one if you see a good opportunity. However, you might not have enough money to venture into that other business. In that case, you can opt to sell your current business in order to purchase and run a different one.

A Good Offer You Cannot Refuse

Though rare, a buyer can present a good offer even when you haven’t thought of selling your business. It can be an attractive offer priced way above the market value of your business, and you find it hard to let it pass since you might not get such an offer in the future. It’s entirely up to you what to do, but make sure to think things through.

Boredom

At some point, you may get bored doing the same thing over and over again. Even if you’re generating a lot of revenue, you might want to try something else. It takes a lot of dedication to run the same business for many years, and there may come a time when you decide to venture into another field or industry. It would then make perfect sense to dispose of your current business first before switching gears.

Retirement

Retirement is a common reason why most people sell their businesses. After spending many years running a company, you may decide to fund your retirement with the proceeds from the sale of your business. Even if you’ve got a retirement package set aside, disposing of your business can give you that extra money you need to finance your loans or buy something you’ve always wanted.

With that said, whichever reason you have for selling your business, it’s crucial to avoid the mistakes below. In doing so, you’ll steer clear of legal consequences and benefit from the sale of the business you’ve built for years.

Not Working With An Experienced Business Lawyer

When it comes to selling your business, failing to work with a seasoned lawyer is a big mistake. Although there are many lawyers out there, not all of them are experienced. Trying to reduce expenses by hiring more affordable yet inexperienced lawyers may cost you a lot in the future if there’s a legal issue they can’t handle properly.

Finding a lawyer for your business sale should be your priority when preparing to sell your business. They’ll guide you on the legal procedures, provide you with a roadmap you should follow, and discuss the pitfalls you have to avoid.

A lawyer can also act as a tax advisor, so the one you choose should be able to advise you on the tax consequences of your business sale. Also, they help you understand other matters such as the structure of the sale, preparation of a document, warranties, and representation.

An experienced business lawyer will assist you in drafting legal agreements, too. As a seller, you might face many risks and challenges in the process of selling your business, so you may lose a lot if you don’t have good binding agreements.

Ignoring The Non-Disclosure Agreement

You should have a non-disclosure agreement (NDA) when selling your business. Signing an NDA is vital because it prevents potential buyers from disclosing important details about your business. If the buyer neglects to sign an NDA, they can reveal vital aspects about your negotiations that could negatively impact your business.

Skipping The Letter Of Intent

Another way you can protect your interests when selling your small business is to have a letter of intent (LOI). This is one of the essential negotiating tools you should have at your disposal. You might be reluctant to use an LOI, fearing that it’ll slow down the sale transaction. However, since it’s ultimately for the benefit of the seller, you shouldn’t skip it.

Depending on the circumstances, the letter of intent can be binding or non-binding. It contains the details of the agreement between the seller and the buyer. The agreement, which should be negotiated beforehand, allows the sale deal to carry on without any challenges.

Included in the LOI is a termination fee for the buyer clause. The buyer will be required to pay a termination fee if they breach the sale agreement for a reason that it isn’t the seller’s fault. It goes without saying that the seller won’t carry the burden if the sale agreement doesn’t go through as planned. This clause also helps ensure that only serious buyers can approach the seller.

Notifying Your Employees And Clients Too Early

Notifying your employees right away about your intent to sell your business is a big mistake you should avoid. Ideally, most employees who find out that their employment roles are changing or those who anticipate major layoffs might end up looking for other jobs.

If that happens, you might find yourself losing valuable employees long before the sale deal is actually finalized. If you’re unsure of when to notify your employees about your intent to sell, consult one of the legal recruitment agencies in your area. They should be able to advise you on all matters regarding employment.

On the other hand, clients might get confused if they hear about your intention to sell your business. They may start looking for other service providers and switch to a different company before the sale deal goes through. Also, potential clients might be reluctant to join your company, thinking that the quality of your products will change once the business is owned by someone else.

Related: How to Sell Your Business to Emplyees

Waiting Too Long To Prepare For The Sale

Waiting for too long or not preparing early enough can cost your business. Sometimes, it can even take several years to complete a sale transaction. That’s why early planning is the key to a successful business sale. The best time to start preparing for the sale of your business is the day you draft your business plan.

While this might sound premature, it’ll eliminate committing many legal mistakes when the time to sell comes. Start preparing by updating your business records, business history, and portfolio. Even if you don’t end up selling your business, you’ll have nothing to lose by maintaining proper records and having a good portfolio of your business.

Not Working With A Broker

You are a professional at running your business, not selling it. It’s surprising how many business owners avoid working with brokers to help sell their company. It doesn’t pay to save on the brokerage fee since handling the sale without a broker can take too long even before you get a potential buyer for your business.

Brokers will handle the better part of the sales process such as marketing and negotiation. What’s more, some brokers can add 10 or 20 % to your sales price.

Related: How to Sell Your Business Without a Broker

Ignoring Post-Sale Matters

While you may think that your duty ends after you’ve received the payment from the buyer, don’t ignore what happens after the final transaction. In order for the sale process to run and end smoothly, there must be a transition plan in place.

You shouldn’t ignore the details involved in the transition. For instance, if you’d agreed to offer training to the new business owner, it would be better for you and everyone else if you kept your word.

Related: Closing the Deal

Takeaway

When selling your business, it’s always best to prepare as early as possible. Although each circumstance is different, you must avoid making mistakes, legal or otherwise, in order to keep additional costs and any delays at bay. You should ensure that your business establishment and records are in order before you pass your company on to the next owner. See to it that you work with professionals like brokers and lawyers as well since they can help with the valuation of your business without disclosing any details about it.


Deborah Anderson

Deborah Anderson is a business consultant, specializing in various strategies to sell a business. She has been active in business seminars and conferences, and shares her knowledge through guest posting. Deborah is a mother of two and she loves swimming, gardening, and painting.



Published by ExitAdviser |

Content ID: 8534