Successful Sale Of Your Business
Elarbee Law can assist, advise and represent your business when an opportunity for an advantageous sale is presented to you. Our firm helps guide and advise business owners in the multi-stage process of buying or selling a business, including:
- advising on the transaction structure
- negotiating the terms and drafting the deal memorandum
- advising sellers on legal strategies to address issues raised during the due diligence process
- advising buyers on legal due diligence
- drafting, reviewing and negotiating the extensive documentation involved in a business transaction, such as asset purchase agreements, stock purchase agreements and security agreements
Over the years, Elarbee law has also developed an extensive network of highly regarded business evaluation experts, accountants and private equity investors looking for mature and successful businesses as an investment. All of our resources are brought to the table in advising your company on the culmination of your hard work and success.
Owners Checklist In Selling Business
In the sale of any business of value, the potential purchaser will want to conduct its own due diligence before going "hard" with a contract. Depending on the size of the business, this can range from thirty days to several months. During this timeframe, the potential purchase will want and need access to your corporate books and records, contracts with customers, key employee information, lease obligations, inventory and other related issues.
It is very important during the due diligence phase that you receive legal advice as to how to respond to request for information, protect confidentiality, trade secrets and employees from being "raided" by the potential purchaser. The company's balance sheet, P/L statement and legers need to be accurate and up to date in a professional manner so as not to raise unnecessary concerns or questions during this timeframe.
A Nondisclosure Agreement will protect your company during the due diligence process. It will maintain the confidentiality of the records and information produced to the potential buyer and provide for penalties if the information is ever used in a manner that is harmful to your company. It will also require that all document provided or turned over will be returned to the company at the end of the due diligence process. It may also require that the potential purchaser not solicit or attempt to hire any of your key employees for one to two years after the Nondisclosure Agreement is entered into between the parties. In the event the deal falls apart, this would prevent the purchaser from recruiting away key employees.
Letter of Intent
A letter of intent ("LOI") is a non-binding offer outlining major terms of the potential purchase of your business. It very well may set of out the purchase price, closing date, due diligence period, hold harmless clauses and the ability of either party to terminate any preliminary negotiations without legal consequences.
Although an LOI is usually non-binding, there are certain key provisions that appear frequently in most LOI:
Both parties usually represent that they have not engaged a broker or dealer that would be entitled to a commission upon the closing of the transaction. Conversely, both parties could represent that if a broker or dealer claims a commission or fee from one side the other side would indemnify the other party for claims. This is designed to protect the parties should a broker surface later and want a piece of the pie.
Both parties usually agree that they will pay for their own expenses during the due diligence phase and contract negotiations. This would include the expenses of lawyers, accountants, bookkeepers or others involved in assisting either party in the sale.
It is not that unusual for part of the purchase price in the sale of your business to be paid over time. Typically, the buyer pays some portion of the proceeds at closing and over the next twelve to twenty-four months the balance is retired based usually on income being generated by the business. In many instances, this may be the only viable way for the buyer to purchase the business but it can turn into a nightmare if the purchaser defaults on the remaining balance but is still operating the business. We would advise extreme caution and protective drafting of any agreement that contains an earn out provision.
Protect Yourself after Sale
Your goal is to sell your business and walk away to retirement or your next venture. You do not want to be worried about being sued by the buyer down the road for certain representations or warranties that you made in the agreement. This is where the drafting of waivers and releases becomes very important. It is also recommended that representations and warranties be confined to the four corners of the document and not what was discussed or represented during the negotiations leading up to the sale. The drafting of a clear Merger Clause should address this issue.
The sale of a business can have significant tax ramifications for the seller. At the end of the day, the only bottom line is what you put in your pocket after Uncle Sam makes a visit. It is critical at the very early stages to assemble the right tax expert to assist you in structuring the sale in a most advantageous manner. Is it a sale or merger? Are you receiving all cash or stock? Are you planning on retiring after the sale to a state like Florida that has no state level income tax? All of these issues can impact your tax liability from a sale.
As part of the sale, the buyer will expect and usually demand that you and most likely your key employees sign non-compete agreements. These are usually structured around two to five year periods. After all, why would the buyer want to purchase the business and then have you and your employees walk across the street and open the exact same business? The best way to deal with these types of agreements is to negotiate limits on their scope and geographic region.
In some instances, the buyer will want to retain your services for a period of twelve to twenty-four months. The buyer wants a transition period and time to cement the business and relationships. In this case, the buyer will insist on an employment agreement that will usually contain non-disclosure and non-solicitation clauses. While these employment agreements seems to be in everyone's best interest, we have found them to be problematic at best. It is sort like selling your house but continuing to still live in it. At some point, you are read y to move on to the next house. We have also found it very hard for business founders and entrepreneurs to become mere employees after the sale of their life's investment.