What are the legal steps you need to take before selling a business?
It is vital to be aware of the legal aspects of selling a business to avoid future problems. There are six legal steps outlined below which help you work your way systematically through the sale of the business. Each of these steps is designed to protect both the buyer and the seller and when followed will help streamline the entire process.
The six legal steps to follow during the sale of your business:
- The Signing of the Letter of Intent
- Buyer Due Diligence Process
- Drafting of Purchase Agreement
- Discussion of Buyer Financing & Payments
- State Law Considerations
- Transferring Business Ownership
1) Signing the Letter of Intent
Have you found a serious buyer for your business? The very first legal step to take when selling your business is to draft up a Letter of Intent. This letter can be written by either the buyer or the seller. It is a non-binding document containing details of the transaction such as the deposit amount, due diligence terms, and the purchase price.
The Letter of Intent goes by many names – Term Sheet, Purchase Offer or Proposal to Buy a Business. This Letter of Intent serves to weed out the time-wasters as a deposit will usually be required by the seller. However, if the purchase of the business does not proceed the deposit may be refunded.
With this Proposal to Buy a Business, a buyer can approach lenders to secure a loan to buy the business. This document will also serve as the foundation for the purchase agreement that will be drafted by the buyer and seller’s attorneys.
2) Due diligence conducted by the buyer
The seller must have their company documents in order for interested buyers. Having signed the Letter of Intent, the buyer begins their financial, operational and legal due diligence process. How the due diligence will be carried out will have been laid out as a clause in the Proposal to Buy a Business.
During this critical step, the buyer carries out an extensive and comprehensive research about the business they intend to buy. They will be looking at sales reports, business contracts, customer records, company leases, expense statements, and other financial reports.
This step is done independently by the buyer and the seller needs to furnish them with all documentation needed for them in order to make an informed decision. Furthermore, in the event that the buyer wishes to sue you after the sale, you’ll be protected by the due diligence clause.
3) A purchase agreement is drafted by an M&A attorney
By the time a purchase agreement is being drafted by an M&A attorney, it’s because everything has progressed well so far. Both buyer and seller have signed the Letter of Intent by now and the due diligence has been carried out. And everyone is keen to close the deal.
The purchase agreement is the legal document that gets the ball rolling so the deal can be closed. This document is legally binding and once the buyer has signed it they cannot get out of it without legal complications. The purchase agreement obligates the buyer to proceed with the purchase of the business according to the agreed-upon terms and conditions stated in the document.
It is imperative to hire an M&A attorney who is well versed in contractual law as the purchase agreement might be quite a lengthy document. Your attorney will know what clauses to include to protect you the seller from any future litigation problems brought forth by the buyer. Your lawyer will also review the agreement before you sign to ensure that everything is in order.
4) Discuss the buyer’s payment method
There are different ways to finance the purchase of a business. However, you want the least cumbersome method. Try and avoid settling for a seller financing deal. What exactly is a seller financing deal and why do you want to stay clear of it? It’s an arrangement whereby the buyer agrees to pay you on a monthly basis. So, sort of like they are renting to buy the business.
The problem with this type of financing is that should the buyer run into any difficulties and they start to default on payments, you’ll have to undergo an exhausting legal procedure to get back ownership of the business. In the worst-case scenario, the buyer might have already done irreparable damage to the business. Your M&A advisor and attorney will advise you on the most preferable payment type to accept from the buyer.
5) Familiarize yourself with your local state laws
Each of America’s 50 states has a unique set of laws that govern the sale of a business. For this reason, you cannot afford to be ignorant of them whether you are the seller or the buyer. The laws revolve around the particular actions that both sellers and buyers are obligated to fulfill prior to the closing of the deal. Failure to adhere to these state laws can result in a hefty fine or even the stopping of the business sale.
This is particularly important if the company is a corporation and has shareholders and a board of directors who must be consulted. In some states, the seller will be required by law to prove to the buyer that there are no associated sales taxes that are due. In addition, there might be sales and or transfer taxes to factor into the final purchase agreement. Your M&A attorney will be happy to advise you on these intricate matters and the best way forward.
6) Transference of business ownership
When all the above processes have been carried out – i.e. you have signed all the necessary paperwork, the buyer done their due diligence, discussed the buyer’s financing method, and you’ve verified your compliance with all state laws, you may now proceed to the final legal step which is the handover or transference of business ownership to the new owner. This last step involves signing a lot of legal contracts that ratify the sale of the business and give ownership to the buyer.
Talk to a legal expert about selling your business
Would you like to discuss selling a business with an attorney? Get in touch with one of our advisors to learn more about how Sun Acquisitions can help during the buying and selling of a business.
Disclaimer: Any information provided in this blog is not intended to replace legal, financial, or taxation advice given by qualified professionals.