Legal Considerations When Selling A Business
If you’re selling your business, there’s a good chance it’s because it was successful, and you are looking to step back (or, start another business venture). Either way, selling your business should be a positive experience for you, and it can be by following some simply legal guidance.
Basic Legal Considerations
Just because your business is successful and established doesn’t mean your business sale will go well, and problem free. As a seller, the last thing you want is to worry about lawsuits or liability after the business has been sold. Taking basic legal precautions during the sale proves can give you peace of mind in the sale of your business.
There are some basic documents that you will want to enter into with the potential buyer. Many of them involve the buyer’s process of investigating your business, called due diligence.
Some documents you may want signed or agreed to by the potential buyer include:
Letter of Intent (LOI) — A LOI is both sides saying they are looking to buy and sell a business in good faith. Think of it as an ”agreement to agree” on something in the future. The LOI is often not legally binding but may have some terms that will be effective and binding.
For example, you can say that if the sale goes through, there will be 60 days to close, or that the parties will provide X, Y and Z documents to each other during the investigation process. LOIs can also say what brokers, investigators, or experts will be used in the investigation and sales process.
The LOI may also restrict the potential buyer and you as the seller, from entertaining any other purchase or sales offers, while due diligence is going on.
Trade Secret Agreements — The potential buyer needs to look in depth into your books, records, finances, bank accounts, intellectual property, and every other detail about your business. If the sale doesn’t go through, the potential buyer could use that information against you or make it public.
That’s why you want an agreement that says that the buyer cannot use the information gathered during due diligence, for any reason whatsoever.
Limits of Liability — You will want two kinds of limitations of liability. The first is one that says the buyer will not sue you, especially for anything the buyer could have discovered about the business but did not.
You also will want the buyer to indemnify you—that is, to hold you harmless from any claims by any third parties related to the business or the sale. This is especially important if your business is also selling the liabilities of the business and the buyer is accepting them.
Earnout and Payment Timing – Will the entire purchase price be paid at the sale? Or only a part, paid out over time? If paid over time, are there conditions on payments, or benchmarks that must be met before future payments are made?