Chances are your business is your most important asset. After success of many years running the kind of business you’ve always wanted, diverse factors could compel you to sell it. It could be desire to reconnect with your family or personal life and allow someone else to continue with the work you had started years back or just a chance to move on to other things. Now, there are a number of things you might want to consider. Of course, the selling process might not be clear as you thought it would, especially the legal considerations you need to pay attention to.
Like most sellers, you probably want to receive offers directly from buyers and make the most of For Sale by Owner (FSBO solutions) available. No matter how you decide to go, there are those little legal matters you need to remind yourself as you continue making preparations for a sale and closing the best deal possible.
Note that if you’ve not done it already you might have to indulge a legal mind to help you maneuver the legal business selling process that can be rather hectic and laden with costly pitfalls. In essence, selling a company you’ve worked hard to nurture and grow into a profit-making entity isn’t always easy.
Among the dozens of considerations you’ll have to make, here are five important ones that many business sellers usually forget.
Don’t ignore/forget to enter into an NDA (Nondisclosure Agreement)
It’s prudent that prior to entering into any lengthy discussion concerning the sale of the business with anyone you sign a nondisclosure agreement. The agreement provides for a lot of things, such as ensuring that all the confidential information shared and provided throughout the process remains confidential for a specific period of time, in most cases five years.
It’s also worth indicating in the agreement that were the discussions to end all confidential documents and other data should be returned immediately. Even better, you can actually take the nondisclosure agreement a step further, perhaps to indicate that the potential business purchaser won’t be hiring or soliciting your staff thereafter or up to a few years after the signing of the agreement.
Most importantly, it guarantees that were the deliberations to breakdown the potential buyer won’t return to entice your employees. This is because throughout the process the potential business buyer will be in contact with some of the employees and receiving critical Intel and information about them and might use that private information to start a clandestine recruitment process.
The Letter of Intent is imperative
While it might not be binding, a letter of intent allows a potential buyer to indicate all the different terms that the transaction is bound to have. It offers an outline of transaction and the structure to be followed, the expected buying price as well as closing date and other matters such as closing conditions, indemnification and escrow.
The letter allows both the seller and buyer to come into an agreement on diverse areas of the transaction and understand disagreement areas if any. In the process, it offers a clear picture of the entire purchase process; lawyers from both sides can use it to draft any required legal document.
Note that while it might not be legally-binding, clauses in the letter such as "no shop" are serious and shouldn’t be taken lightly. A no shop type of clause will mean that you won’t be entertaining offers from elsewhere until a specific period is over, such as up to two months. It means the business of soliciting offers from other potential buyers will be suspended until that period has elapsed or a deal agreed.
Within that period you will be negotiating back and forth with the potential buyer as indicated in the letter of intent until you’re done.
Third party escrow and limiting liability
It’s important that a percentage of the selling price be held by a third party in an escrow facility for an agreed time frame such as one year to almost two. The funds (largely 10-20 percent of the buying price) ensure the business seller is legally compelled to comply with purchase agreement’s guarantees and representations.
If the buyer ascertains that the warranties and/or depictions aren’t true or reliable the escrow funds will come in handy. As the seller, you might want to ensure that the escrow funds are as minimum as possible and the escrow time frame the shortest possible.
It’s also possible that were warranties and representations to be breached by the business owner within the selling process the potential buyer might insist that there be a zero limitation on the seller’s liability for it. In this case, as the business seller, the most important thing is ensuring your liability is limited as much as possible.
The escrow amount should indemnify the buyer in such a case. Critically though, consider negotiating this provision as much as possible rather than live worrying that the buyer might one day return to make a claim that would see you return a good chunk of the purchase price to the interested buyer.
Prepare for Non-competes
You should expect the potential buyer of your business to come up with non-competition agreements to be signed by key people in the company, including you as the owner. Most jurisdictions across the world enforce non-competition agreements entered within the process of a business purchase.
In principle, the agreement requires that the business seller and perhaps some of the employees to never invest or get involved in the same type of business for a specific period of time, such as five to six years. It means that as the business seller you should be ready to remain out of the industry or business line you’ve indulged yourself for the better part of your life in exchange for the compensation you receive from the sale.
In case you have plans to engage in the same type of business as soon as possible, ensure the non-compete agreement has been negotiated well and the period narrowed as much as possible.
Seek help with the purchase agreement
Selling a successful business is not easy and can be complicated. Perhaps all you know is to run the company and very little about selling it. Do consider seeking legal help rather than going it alone, including making the most of your accountant or finding a good one if you don’t have and an experienced broker just in case. This way, the complicated and tricky waters of selling a business won’t be as overwhelming as they could be.
Most importantly, use your legal counsel to come up with a well-drafted purchase agreement. It helps lay down the scope of the business selling process, clearly indicating what you’re actually selling, liabilities that are there and other matters such as indemnity fund and assets allocation for taxation.
Above all, remember you only have leverage before you have entered into a clearly written letter of intent. It’s the only time you have to make most of your leverage. After signing the letter the leverage will almost immediately shift to the potential buyer until the deal is completed, unless you decide to break down the transaction and walk away.