Business Law - Question #2:
What legal steps should I expect when selling my business?
When selling your business, it is important to take the necessary legal precautions to ensure that you correctly and fully transfer your business and/or business assets, and that you are aware of any potential liabilities or responsibilities you may maintain after the sale is complete. Although a deal may seem straight forward, without the proper legal documentation in place you may be opening yourself up to future lawsuits concerning issues such as taxes, equipment or stock discrepancies, employment benefits and more. The buyer of your business is also generally concerned with protecting their investment in purchasing your business or assets, and in avoiding taking on any unknown liabilities as part of the transaction. Due to these different, although not necessarily competing perspectives, most business sale transactions are broken into three larger steps or categories with associated documents and processes for each.
Step 1: The Letter of Intent
In most sales, a Letter of Intent is a formal, written offer from the buyer to the seller of a business wherein the buyer outlines what he/she is willing to pay to purchase the business, as well as other essential terms of both the ultimate transaction, and of the period leading up to the signing a more complete, binding agreement between the parties. Among other protections, signing a Letter of Intent may allow both parties time to negotiate the terms of the final agreement, to inspect any assets included in the sale, to set an official date for closing on the transaction, ensure privacy of the purchase price and other terms of the sale from public disclosure (including the existence of the transaction), and time to prepare the business for transition to a new owner. As some of the terms of the Letter of Intent may be binding on the ultimate agreement between the parties, it is important that before the seller signs his/her agreement to the Letter of Intent, any negotiation on its terms is completed to the satisfaction of both sides and a finalized Letter of Intent is prepared.
Step 2: The Purchase or Sale Agreement
After a Letter of Intent is signed, the seller and buyer begin the process of finalizing the written agreement which should comprehensively address all the terms of the transaction. Since this document is so important, often finalizing it to the satisfaction of both parties requires multiple rounds of negotiation between the buyer, seller and their respective attorneys. Some of the most common terms addressed in the final agreement often include, but are not limited to:
- The purchase price;
- The method of payment of the purchase price (such as a promissory note or cash at closing);
- The assets or business interests included in the sale;
- The assets or business interests NOT included in the sale;
- How accounts receivable and payable will be handled as of or after closing;
- How employee benefits will be handled and which employees, if any, will be kept after closing;
- Prorations of expenses including utilities, ongoing third-party contracts, taxes, payroll, and more;
- If the seller will be providing any transition services after closing;
- If and how notice of the transaction will be given to clients, third-parties or customers; and
- What promises the seller and the buyer are giving to each other in relation to the transaction, such as their authority to enter into the transaction or the condition of the business or its assets.
Step 3: The Closing
After the negotiation period is complete, the parties will come together (either in person or virtually) to sign the required transaction documents, including the formal purchase or sale agreement, any applicable bill of sales, promissory notes, consents of the business officers or managers, and other financing documents, if applicable. The purchase price will also likely be transferred on the date of closing and as of that date, the assets or business interests, along with the associated liabilities and responsibilities, will change ownership to the buyer. The closing is the summation of the entire purchase and sale process, and, if all the other steps are handled with the proper care and consideration, is also your opportunity to complete the transaction with confidence as you move forward.
As mentioned above, the steps outlined are not a comprehensive list of all the smaller steps along the road to selling your business but may be used a general framework for some of the larger milestones in the process. As every business is unique, the specific goals and values of the business seller and buyer should steer the entire sale process and be reflected in the documents prepared and signed by the parties. If you are considering selling or purchasing a business, or are in the midst of either, our dedicated and experienced team is ready to assist you in achieving your specific goals and in navigating the legal junctures of the transaction.
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