Whether you’re selling an existing business because you’re an entrepreneur ready for a new challenge, or you’re looking forward to a comfortable retirement, legal issues should be addressed long before you put out the “FOR SALE” sign.

Sure, you know your business, but do you know the legalities of a business sale? You may understand contracts, but do you fully understand a sales agreement? If not, seeking legal counsel is essential to receiving and keeping the most capital for all those years of hard work. There are other legal questions sure to come up during and after the sale of a business, so find an attorney who specializes in business acquisitions and mergers.

Your current legal counsel may be a top-notch advisor, but if he or she has little experience in business buying and selling, you may have to contact a specialist – a lawyer who’s advised numerous business owners on the sale of a business. Find the right advisor with the right experience before you put the company on the market.

Start early. Positioning your business as an attractive buy takes time. Get the books in order, tax filings up-to-date, fix the leaky pipes, and give yourself time to develop a sales strategy that delivers the most benefits.

Prepare a nondisclosure agreement (NDA) and get it signed by all stakeholders. Because a buyer wants to know everything about your business, from bookkeeping practices to your client list, have your lawyer prepare an iron-clad nondisclosure agreement to protect what’s yours. An NDA is designed to protect you in the event that the sale doesn’t happen.

For example, before disclosing company information, have the potential buyer sign a legal agreement that prevents pirating key employees or clients. That way, if the deal falls through, your business is still intact, ready for the next buyer to examine in detail.

Also, add a non-compete clause to the NDA to prevent a prospect from going after your existing clients in the event that a sales agreement can’t be reached. Also, expect buyers to insist on a non-compete clause that prevents you from competing against the new buyers for a certain period of time after the sale.

Review existing contracts with legal counsel. Any business, large or small, has performance contracts in place, from a rental agreement for your office space (your lease), to agreements that bind your business to certain performance standards, like delivery dates, guarantees, warrantees and other agreements that, most likely, will be binding on the new buyer.

Determine if these agreements can be transferred to the new owner. A lease on office space, for example, may not be transferable to a new owner, and that can stop a business sale in its tracks. In this case, discuss the sale of your business with the owner of your business space to make sure that the landlord approves the transfer of your current lease to the new owner. No lease may mean no sale.

Create a letter of intent with your legal counsel’s advice. A letter of intent may or may not be a legally-binding agreement, but it’s certainly a document any serious sellers and buyers want to review with their experts in acquisitions. A letter of intent describes in detail which parties will perform particular actions, how payment for the business will be made, when certain obligations become due, and other details describing the legal transfer of ownership.

A letter of intent may include any or all of the following:

• total purchase price and dates payments are due
• employee agreements
• transfer of tangible assets at a price that’s in writing
• how the new owner will pay the purchase price (lump sum, on-going earnouts, escrow accounts, etc.)
• non-compete agreements (see above)
• business tax issues and liabilities
• professional responsibilities of current owner and prospective buyer
• a lock-tight schedule of steps that ultimately conclude with the transfer of ownership
• liability protection for you, your employees, vendors and others with whom you conduct business

There’s more to selling a business than a simple handshake, especially if the business is established, has binding contracts, liabilities and intangible assets. This is not a time to go it alone.

Contact an investment banker, a business broker and your tax professional to make sure the sale happens on time, and with no surprises. Then move on to the next adventure in your life, secure in the knowledge that you, your family and heirs are protected.

 

The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of Zions Bancorporation, N.A. Member FDIC