Legal Considerations When Selling a Business

By Clint Wilson, Business & Real Estate Attorney

Selling a business is a significant decision that requires careful planning and consideration. It also involves various legal implications that can have long-term consequences for the seller. Consulting with an attorney who specializes in business transactions can help sellers navigate the complexities of the sale process and ensure that their interests are protected.

Deal Terms

One of the key reasons why sellers should consult with an attorney when selling their business is to ensure that the deal terms are accurately reflected in the purchase and sale agreement. The purchase and sale agreement outlines the terms and conditions of the sale, including the purchase price, payment terms, representations and warranties, and any contingencies that must be met before the sale can be completed. An attorney can review the agreement to ensure that it accurately reflects the seller’s intentions and captures the deal terms negotiated in the term sheet or letter of intent.

For example, if a seller wants to retain certain assets after the sale (e.g., real property, art, intellectual property, cars, etc.), an attorney should expressly exclude these assets from the sale. However, many purchase and sale agreements involving the sale of assets (as opposed to a stock sale) will often define the purchased assets as “all assets used in connection with the business.” Without legal guidance, sellers may overlook important details, including excluding certain assets from the sale, that could lead to disputes or legal challenges in the future.

Limiting Liability Following Closing

Another important reason to consult with an attorney when selling a business is to limit the seller’s liability after closing. Sellers may be held personally liable for breaches of representations or warranties made in the agreement, exposing them to potential legal and financial risks years after closing. An attorney can help sellers understand their liabilities and obligations under the agreement and take steps to mitigate these risks. For instance, an attorney can ensure proper disclosures are made to avoid misrepresentations and negotiate caps and survival periods for certain types of liabilities. By including these provisions in the agreement, sellers can limit their exposure to potential legal disputes after closing.

Preparation of Ancillary Agreements

In addition to the purchase and sale agreement, sellers may need additional ancillary agreements that should also be prepared in a manner that protects their interests. These agreements might be fundamental to the deal and may include promissory notes, lease agreements, non-compete agreements, etc. An attorney can prepare these ancillary agreements to best protect the seller’s interests and avoid potential conflicts with the buyer in the future.

Due Diligence

What Due Diligence is Required from the Buyer and Seller?

Due diligence involves a thorough investigation by both the buyer and seller to verify all relevant information about the business. This includes financial statements, contracts, employee records, intellectual property, and any legal or regulatory issues. Sellers must provide accurate and complete information, while buyers should scrutinize this information to make informed decisions.

How to Prepare for Due Diligence?

Preparation involves organizing all business records, ensuring compliance with legal and regulatory requirements, and addressing any potential issues that may arise during the review process. Sellers should work with their legal and financial advisors to compile a comprehensive due diligence package.

Valuation

How to Value the Business Accurately?

An accurate valuation is crucial for a fair sale. Methods include income approaches (e.g., discounted cash flow), market approaches (e.g., comparable company analysis), and asset-based approaches. Engaging a professional appraiser or financial analyst can ensure a reliable valuation.

Legal Documentation

What are the Necessary Legal Documents?

Essential documents include the Letter of Intent (LOI), Purchase Agreement, and any ancillary agreements such as non-compete agreements, lease agreements, and promissory notes. These documents outline the additional terms and conditions of the sale.

Compliance and Regulatory Issues

What are the Relevant Laws and Regulations?

The sale of a business must comply with local, state, and federal laws. This includes tax laws, employment laws, and industry-specific regulations. Non-compliance can lead to legal disputes and penalties.

How to Ensure Compliance?

Sellers should consult with legal and regulatory experts to identify applicable laws and ensure adherence. This may involve obtaining necessary licenses, permits, and regulatory approvals.

Tax Implications

What are the Tax Consequences of Selling a Business?

The sale can have significant tax implications, including capital gains tax and potential tax liabilities for the seller. Structuring the sale properly, such as through asset sales versus stock sales, can optimize tax outcomes.

Intellectual Property

How to Handle Intellectual Property During the Sale?

Intellectual property (IP) assets, including patents, trademarks, and copyrights, should be clearly identified and transferred in the sale. Ensuring proper IP valuation and legal transfer is crucial.

Employment Issues

How to Manage Employee Contracts and Benefits?

Employee contracts, benefits, and potential layoffs need careful handling. Sellers must comply with employment laws and communicate transparently with employees about the transition.

Conclusion

Consulting with an attorney is essential for people looking to sell their business to ensure that the transaction accurately captures the deal terms and limits their exposure after closing. By seeking legal advice and guidance during this process, sellers can mitigate their risks and achieve a more successful sale outcome.

Please Note: This document does not constitute legal advice. Please consult an attorney for legal advice on what to do in a particular situation.