Buying or selling a business can be exciting, confusing, and nerve-wracking all at the same time. There are so many different steps and aspects to consider and it’s all too easy to feel like you’re in over your head. For many business owners (or soon to be business owners) ensuring all legal factors have been addressed is one of the most confusing parts of the entire process. Here, we will go over some of the most basic legal factors to be considered when selling or buying a small business.
Choose Competent Legal Counsel
The first, and probably the most important step, whether buying or selling a small business, is to seek competent legal counsel. No matter how much you research the legal factors associated with the purchase or sale of a business, you’re never going to understand as much as a lawyer will. The truth is, there’s so much to cover, without proper legal counsel you can quickly and easily get overwhelmed. In particular, you may need to seek legal counsel in the area of mergers and acquisitions. This is a specialized area, so ensure the counsel you find is knowledgeable in this area.
Negotiating a Contract
No matter whether you’re buying or selling, you need to ensure you’re ready to negotiate a contract. Purchase price agreements can be far more complex than just agreeing on what you’re going to offer or accept as an offer. What’s more, the terms of payment can have a significant impact on the closing of the deal. You may need to consider factors such as earn-out provisions or commission agreements, as well as determining target working capital vs. actual working capital. As a buyer, you may need to consider negotiating escrow or a holdback as a means of protection from losses that could be caused by misrepresentations by the seller.
Limitation of Liability
Limitation of liability will prove to be an incredibly important consideration for both parties. Buyers may insist upon no limitation of liability should there be a breach of representations. Of course, for sellers, you’ll want to limit your liability if such an event were to occur. In both cases, this is a critically important provision that needs to be carefully negotiated. The last thing you want as a seller is to sell your business and then get a claim from the buyer that might mean paying back a chunk of the purchase price. As a buyer, you don’t want to purchase a business for significantly more than it turns out it’s actually worth.
Drafting Agreements
Several agreements need to be drafted during the sales process. For example, it’s important to have a confidentiality agreement to protect shared information between the seller and buyer. You’ll probably also need a letter of intent, which sets out the terms and conditions of the sale and the negotiations. Such a contract isn’t a purchase agreement, but it may lay down binding components like an exclusivity period. You’ll, of course, eventually need a sales agreement too, which is going to detail everything to do with the purchase. Buying or selling a small business includes a lot of detailed agreements that need to be drafted up accurately and professionally.
The business you’re buying or selling may be small, but the sales process certainly is not. If you wish to seek counsel regarding the purchase or sale of a small business, Emerald Law can help. We counsel individuals just like you on all matters associated with entrepreneurship and small business dealings.