5 Legal Considerations for Sellers

Date: January 03, 2014

Ensure a smooth sale of your small business with these tips

As a small business owner, your company is often your biggest asset, the product of years of long hours, a significant financial investment and a labor of love. So when you decide to sell your small business, you want to make sure that it’s a smooth, successful process. Of course, the price and the buyer are key considerations when selling your business, but there are several legal issues you should bear in mind as well.

1. Determine What You’re Selling: Assets or Shares?

If you are incorporated, you have two choices: You can sell your assets, or you can sell your shares. Generally, selling your shares may provide more tax advantages. But choosing to sell your assets gives you more flexibility to keep certain assets. Determining whether to sell shares or assets of your incorporated business is complicated, so be sure to consult a good accountant and lawyer when making this important decision. If you are unincorporated, you can sell only your assets.

2. Prepare, Prepare, Prepare

When you are marketing your business to potential buyers, make sure your business looks professional from top to bottom. Ensure that all of your legal agreements with suppliers, customers, landlords, employees and others are in writing and properly executed. Typically, prospective buyers will expect to see at least three years of financial records. The more formal your records are (i.e., accountant-reviewed and/or certified), the more confidence potential buyers will have in your enterprise. You should also make sure your balance sheet is as clean as possible: Collect outstanding receivables, and sell off any unnecessary inventory, among other things.

3. Draft a Letter of Intent

When you and a buyer have agreed on what will be sold (assets or shares) and a price, your lawyer (or the buyer’s lawyer) will draft a letter of intent. This non-binding document sets forth the terms of sale and the buyer’s intent to purchase your business. It also allows the buyer to perform due diligence.

4. Create a Confidentiality Agreement

Due diligence is when a potential buyer begins thoroughly investigating your business’ health. Your business will become an open book, and the potential buyer will have access to everything from your company’s financial records to information about your employees, attorney and accountant. The potential buyer will have a finite period of time to conduct this investigation but clearly will learn a lot about your business in the process. For your protection, your letter of intent should include a confidentiality agreement to legally forbid the prospective buyer from sharing information he or she learns during the investigation. It’s wise to enforce the confidentiality agreement until the purchase agreement is executed.

5. Execute a Purchase Agreement

Once you have a buyer, your lawyer will draft a purchase agreement detailing the scope of the sale, including what’s being sold, any liabilities that remain, indemnity payments you agree to make and how the assets will be allocated for tax purposes. Once that agreement is executed, the deal is done.

Selling a business is a complicated endeavor and requires expertise. You know how to run your business, but selling it is a very different venture. Getting the professional help you need—a good accountant, lawyer and broker—to guide you through the process will go a long way in ensuring a successful sale.

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