Legal Issues When Selling a Business

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 Selling a Business

A business owner may want to sell their business once it has been established. There are several reasons to do so, but the most common reasons for selling a business include:

  • The business is no longer profitable to the business owner;
  • The sale or breakup of the business is part of a larger court order, such as if the business is being terminated due to a legal violation;
  • The original owner and/or operator can no longer be involved with the business; or
  • It would be a better investment to sell the business.

When a business owner decides to sell their existing business, they will need to be ready to commit some time to organizing all of their financial documents. Additionally, they will need to spend a considerable amount of time getting the company in order. Business owners should do their best to ensure that the company is not currently facing any legal problems, nor is it at risk of being sued in the foreseeable future. This is done to ensure that there will be no major disruptions during the transfer of the company from one owner to another.

Selling a business can be made easier by hiring an agent. An agent will assist in advertising that your business is for sale, which can in turn bring in more offers. Additionally, an agent can advise selling owners of whether specific offers are worth considering.

Purchasing an existing business has numerous benefits, for both the purchaser and the seller. For the buyer, such benefits include:

  • The company, physical location, employees, and customer base are already established;
  • Saved time and energy required to start a new company;
  • Buying an already established company is less expensive than attempting to start up a new business;
  • Easier to handle and manage from the beginning; and/or
  • Comes with inventory and machinery.

What Are Some Legal Issues to Consider when Selling a Business?

There are several legal issues that may arise in relation to selling a business. Some examples of such issues include, but may not be limited to:

  • How to handle or divide company vehicles, production equipment, and other types of business property;
  • Distribution of profits and handling of debts;
  • Managing tax records, sales receipts, and other documents;
  • Managing open or ongoing accounts, if any exist;
  • Whether to change production of products or provision of services; and
  • Creation and negotiation of sales contracts.

The most common legal issues in a business sale are those involving the division of property and handling of debts. These issues most often require extensive analysis in order to determine the exact amounts owed.

Legal Documents Needed to Sell A Business

Selling a business requires several different legal documents that must be obtained before the sale can proceed. Depending on local laws, a seller will need some or all of the following examples:

  • A non-disclosure confidentiality agreement;
  • A personal financial statement form which must be completed by the buyer;
  • Offer to Purchase agreement;
  • Note of Seller Financing;
  • Current financial statements, as well as the financial statements for up to three years past;
  • Statement of seller’s discretionary earnings and cash flow;
  • Financial trends and ratio report;
  • Accounts aging reports, including both accounts payable and accounts receivable; and
  • An inventory list which details values.

These documents are most commonly obtained through an online form bank. Alternatively, most banking institutions can assist with locating and producing such documents as well. Providing hard copies of these documents which contain accurate facts, figures, and financial statements will attract more serious buyers and initiate the selling process.

Once the selling process has been initiated, a person selling their business will also need:

  • A letter of intent listing the terms of the transaction;
  • Buyer’s due diligence, which is contained within the letter of intent and indicates that the buyer will verify all aspects of the business;
  • A purchase agreement, which is a legally binding document locking the buyer into the price and other terms as agreed to; and
  • Confirmation of the buyer’s method of payment.

What Is a Business Purchase Agreement?

A business purchase agreement may also be known as a sale of business contract, or a business transfer agreement. It is utilized to transfer business ownership from the seller to the buyer. A business purchase agreement most commonly includes the following information:

  • A detailed description of the goods and services that are being sold with the corporation;
  • The total payment due, along with the time and manner of payment;
  • A clause which states that both parties must agree to and approve of any changes to the agreement, in writing;
  • How long the buyer has to inspect the building that houses the company;
  • The state whose laws govern the agreement, generally the state in which the company exists;
  • Financial arrangements, such as how the buyer intends to pay for the company;
  • A description of all real property (such as real estate and buildings), if any, as well as the personal property (such as machines and furniture) that is to be transferred;
  • The minutes of the corporation organization authorizing the sale, if the business keeps minutes; and
  • All warranties of the seller which are intended to protect the contracted parties but are often optional.

What Is Business Succession Planning?

Business succession planning refers to the long-term planning of issues such as business termination, dissolution, or the transferring of ownership rights to another party. Succession planning is intended to answer the question of what could happen if the current owners are not able to continue leading the business. Because of this, business succession is frequently used to address future business sales.

Although the sale of a business can result from long-term planning, it is more common that the sale of a business results after unforeseen consequences. The most common example of this would be a loss of profit. As such, it is important to anticipate putting the business up for sale in the event that selling the business is required. Making necessary preparations can make the process easier later on.

A well thought-out succession plan should include many provisions intended to address other concerns besides the issue of who will take over ownership. A business succession plan should include:

  • Approximate dates or time frames when succession will begin;
  • Provisions for what should occur incase of the owner’s unexpected incapacitation, such as in the event of severe illness or death;
  • A replacement named in these provisions, as well as how long their responsibilities will last;
  • Identification of who is to be the next successor, or a guideline for how an election should occur as well as instructions to ensure a smooth transition; and
  • A strategic plan for the business after the succession has taken place, including any new revisions to current policies and management structures.

Business owners should view business succession as an entire process, rather than a single isolated event or document. It is advised that business owners begin creating a business succession plan during the initial phases of business start-up, as it is important to have the plan drafted well before retirement or necessitated sale occurs.

Do I Need a Lawyer for Help Selling a Business?

If you are selling your business, you should consult with a skilled and knowledgeable business lawyer. The process of selling a business is complicated and requires a thorough knowledge of not only business law, but local laws as well. 

An experienced business attorney can guide you through the selling process and ensure you have obtained all necessary documentation for the sale of your business. Additionally, an attorney can also represent your interests in court as needed.

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