Most business owners know their business and industry and have the necessary hands-on experience to successfully manage their employees and serve their clients. But few are familiar with what steps to take in order to sell a business and to avoid pitfalls along the way.
The most important and often overlooked aspect of selling a business is preparation. Seamless transactions don’t just happen. Rather than focusing their own needs, sellers should concentrate on what buyers may ask and will need to know.
There are three legal documents that require additional attention when selling your business or company– contracts, non-disclosure agreements (NDAs), and term sheets. These forms establish a solid foundation for a business sale. Engaging a specialized attorney at the onset can protect the interests of both parties, ensure confidentiality, and navigate a successful outcome.
Contracts
Sellers should review all contracts related to the operation of their business before soliciting potential buyers. This includes, but is not limited to, existing legal agreements with suppliers, vendors, consultants, employees, clients, and all third-party providers. Some contracts contain provisions for a change in business ownership.
Prospective buyers and their representatives should carefully examine all contracts attached to the seller’s business. Two common provisions tend to garner the most interest, and sellers should prepare accordingly.
- Buyers should be expected to review the term and termination language in every contract to learn how much longer the agreement runs and whether it can be terminated without penalty.
- The sale of a business may trigger a change of control clause that gives the other party the right to terminate the contract or receive other considerations when the business changes hands.
Confidentiality (NDAs)
When buying or selling a business, an NDA is an agreement between both parties to not to disclose the information about the sale during negotiations of the deal or for a defined time afterwards. Effective counsel will also draft non-disclosure provisions and include them in the term sheet to facilitate open and honest discussions while negotiating a sales agreement.
Sellers might question the need for an NDA if they already know and trust the buyer, but the need for confidentiality can’t be left to chance. An NDA removes the potential harm that can be caused by an unforeseen development or an honest mistake. It legally prevents buyers from disclosing any information they learn about your company during the sales process
An experienced and qualified attorney knows the value of a broadly drafted NDA and the peace of mind it can provide. At a minimum, an NDA should cover the following to ensure confidentiality:
- A non-solicitation period
- Terms
- Circumvention
- The broker’s role
- The advisor’s disclaimer
- The use and return of information
- Agreed-upon exceptions
Term Sheets
Once the seller reviews all contracts and protects business confidentiality, a term sheet should be negotiated and drafted as the master document that covers all considerations of the sales process. The term sheet addresses standard legal points of interest for both parties that should be reviewed by an experienced business attorney.
- Inclusions and Exclusions. Exact language should be used to define what parts of the business are being sold and what parts, if any, the seller will retain. This includes the assets and liabilities of the business. The value of a business to a potential buyer is determined by its assets minus any liabilities incurred.
- Closing Terms. Warranties are contingences put in place that protect both parties from potential material misrepresentations made by either side. Since sellers often like to close a deal as soon as possible and buyers like to take their time kicking tires, a timeline and a deadline for a sale should be negotiated and included in the closing terms.
- Conditions. Sellers should anticipate that buyers and their representatives will make several requirements that must be met before a sale can be consummated. These conditions generally relate to the financing of the deal, performing due diligence, and receiving regulatory approval.
A Trusted Partner
Sellers can endanger their clients and employees if they don’t exercise the same care and diligence, they used in growing their business when it comes time to divest. The successful sale of a business requires the specialized preparation and well-organized communication that corporate counsel can provide. Contracts, NDAs, and term sheets are just a few areas of the sales process that, when skillfully handled, can enhance your firm’s potential value. For more information or to discuss your company’s strategy for selling your business, contact our legal team here or at 619.298.2880.
