One of the most important achievements of an entrepreneur may be the sale of a business. Retirement, new venture, or the payoff of years of hard work, it is not quite as simple as finding a buyer. It involves preparing the legal part of it keenly to safeguard your interests, create value and prevent future conflicts. The following are some of the important legal procedures that any business entrepreneur must know prior to selling his business.
There is due diligence that potential buyers will perform prior to a purchase. This implies that they will demand to view corporate books, shareholder contracts, partnership contracts, licenses, and permits. Ensure that your business is registered, is current on filings and is in good standing with both the state and federal governments. A deal can be postponed or even stopped by any missing or inconsistent records.
Good business practice is not the only reason why good financial reporting is necessary; this is a legal requirement when making a sale. The buyers will investigate the profit and loss statements, tax returns, and the outstanding debts. Also examine important contracts like the vendor contracts, customer contracts and the employee arrangements. In case of one or any agreements, which are fuzzy or lapsed or lack signatures, then clear it out, prior to engaging in negotiations.
Intellectual property (IP) to most businesses is a significant value of the company through trademarks, copyrights, patents, and trade secrets. Ensure that all the IP is duly registered and owned by the firm (not by a specific employee or contractor). In case your brand name, software or designs are not legally registered, you should look at obtaining the rights prior to the sale.
A business transition can be highly dependent on employees. You will have to go over employment contracts, confidentiality agreements, and non-competition agreements or severance. In other sectors, the purchaser might seek guarantees that their main employees will remain with them following the purchase. Well defined legally binding contracts facilitate the transition.
Among the most important legal ones is the choice on whether to sell the assets of the business (equipment, inventory, contracts, IP) or ownership interests (shares or membership units). Both alternatives have various tax, liability, and regulatory implications. As an example, the assets sales might restrict the liabilities exposure of the buyer whereas the stock sales would be more favorable to the seller. There are ways of consulting legal and tax advisors to identify the most appropriate structure in your case.
Ask potential buyers to sign a non-disclosure agreement (NDA) before they disclose sensitive information to them. This prevents misuse of trade secrets, customer list, and financial information in the case of the deal failing to close. A legal document that is usually the initial exchange during the sale is an NDA.
A letter of intent includes the rough outline of the deal prior to the writing of the final purchase agreement. It might be premature, but some of the requirements, such as exclusiveness or confidentiality, may be obligational. Collaborate with legal advice to make sure the LOI is a good representation of what you want and that it does not place any obligations on you that were not intended.
The last step in the buying process is the map of the acquisitions. It will concern price, terms of payment, representations and warranties, allocation of liabilities and conditions of closing. In this case, it would be necessary to have the legal advice to make sure that the agreement does not harm your interests, and that it helps to adhere to the laws of the country.
Final Thoughts
There is nothing like a mere financial deal when selling your company, it is a legal matter. Since due diligence and review of the contract up to the structuring of the deal and writing of agreements, every step possesses potential risks and opportunities. Some entrepreneurs even consider alternatives such as Joint Ventures Vs Selling a Business to evaluate what best serves their long-term goals. By engaging experienced legal and tax professionals early in the process, you can safeguard your legacy, avoid costly mistakes, and ensure a smooth transition to the next chapter.