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What Legal Considerations to Keep in Mind When Planning to Sell Your Business

What Legal Considerations To Keep In Mind When Planning To Sell Your Business

The process of selling a business can go much more smoothly and with greater cost efficiency if the seller takes certain considerations into account before initiating legal proceedings. If you are considering selling your business and need help with pre-sale planning, please contact one of our experienced business law and transactions attorneys for assistance.

Consulting with Advisors

Before selling a business, a person should consider visiting with his or her accountant and attorney to discuss:

  • The specifics of the business;
  • A general timeline for the sale of the business;
  • The likely structure of the transaction; and
  • The tax repercussions of the sale.

Sellers may also want to think about setting up appointments with a business valuation advisor and a business broker, both whom can play a crucial role in preparing a business and its owner for the sale.

Determining Deal Structure

In most cases, a business is sold through the sale of stock in the company or through the sale of its assets. Which of these options a seller chooses will have a significant impact on the proceedings. For instance, if a buyer is only interested in purchasing assets, then the parties must identify the specific assets and liabilities that the new owner will assume upon purchase. Someone who just chooses to sell stock, on the other hand, will usually be required to sell everything operated by the company, including all of its assets and liabilities. Before initiating proceedings, business owners would be careful to discuss potential deal structures with their advisors and determine which would maximize value, attract buyers, and limit seller liability.

Reviewing Disclosures

When meeting with advisors, business owners should also review sample documents that could possibly govern a transaction, including what disclosures they will be required to make. For example, when drafting an asset purchase agreement, a seller will be expected to provide certain assurances to the buyer related to litigation, taxes, financial statements, ownership of assets, and compliance with state and federal law. Business owners should consider their answers to these matters ahead of time to determine whether their disclosures will maximize value or have the opposite effect. The parties should carefully review what they will need to disclose upon a successful sale and to determine whether they are willing to be subject to non-compete agreements and other restrictive covenants. Making these decisions in advance of an actual transaction can help the sales process go much more smoothly.

Reviewing Contracts

As part of the due diligence process, buyers will require that sellers provide lists of inventory, as well as documentation about the business’s material contracts and relationships. To this end, business owners should consider taking the following steps:

  • Formalizing personal relationships that might prove valuable to a buyer;
  • Obtaining written contracts with customers or providing details about their course of dealing and history;
  • Considering the use of employment contracts that contain restrictive covenants and non-compete provisions for key employees; and
  • Analyzing their customer base and supply chain and determining whether those relationships are reflected in the contracts.

Taking these measures can help maximize the value of a business to a potential buyer, while also identifying potential conflicts or contract-related issues in time to address them.

Reviewing Company Records

In addition to reviewing and creating new contracts, sellers should also consider reviewing their corporate records and minute books for accuracy. Disorganized or incomplete records could communicate the wrong message about a company to a potential buyer. Similarly, business owners may want to think about separating their personal items from the company if they have not already done so, including personal assets that have become commingled with a business or that impact its operational performance. This may also give sellers the opportunity to address whether property should be separated from the business, whether there are any liens filed against the company, and whether any financing statements related to prior loans have not been terminated. Reviewing these records with one’s advisors can help ensure that sellers don’t miss anything.

Obtaining a Business Valuation

Before entering into negotiations with a buyer, business owners should assess their expectations regarding the value of their company. Obtaining a more specific business valuation can often be helpful at this juncture, including separate assessments of the value of the assets, as well as sales and revenue numbers and earnings calculations.

A Team of Experienced Business Attorneys

For help with your own commercial transaction, please contact the experienced business law and transactions lawyers at Howard, Stallings, From, Atkins, Angell & Davis, P.A. by calling 919-821-7700 today.

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