When you own a business, it becomes more than a paycheck; it is your life’s work. The business can be immensely personal, and the sale of it can be life altering and emotional, even in the best situations. You may be asking yourself: “Do I really need to hire a lawyer to sell my business?” While you are the expert on your company, we are the experts on the legal ramifications, liabilities, and protections you and your family need related to a sale. We can help guide you through the unfamiliar process of an asset or stock sale. Below is a summary of the business sale process.
Confidentiality and Letter of Intent
Before agreeing on the sale of a business, buyers and sellers enter preliminary negotiations over key terms. During these initial conversations, the seller will be asked to begin to share information that they would not otherwise share outside the company nor want the public to know, such as revenue, pricing, and employee information. At this stage, the seller should consider having all potential buyers enter into a confidentiality agreement (also known as a nondisclosure agreement) to best protect the seller’s proprietary information being shared.
Next, if the buyer and seller choose to proceed, often a Letter of Intent (LOI) is negotiated and executed. An LOI, most importantly, will set forth the purchase price, the transaction structure, and any key terms of the sale. An LOI may also have exclusivity terms, limiting a seller’s ability to continue discussions with other potential buyers.
An LOI often contains both binding and non-binding terms. It is important not to fall into the trap of signing one without fully understanding its implications. Even when it is non-binding, sellers need to consider how an LOI may influence future negotiations on the purchase agreement structure, payment terms, leases, noncompetition terms, and post-closing employment or consulting agreements.
Due Diligence Requests
While a purchase agreement is being negotiated, extensive document requests will often be made by the buyer to perform due diligence on the seller’s business. Examples of requested documents include:
- Financial records.
- Material contracts.
- Employee benefit plans.
- Permits and licenses.
- Insurance.
- Corporate governance records.
- Tax information.
- Debts, liens, and many other company records.
Due diligence is a key step for a buyer to confirm the commercial value and viability of the seller’s business. The due diligence process is frequently thorough and time consuming.
Purchase Agreement Negotiations
The purchase agreement serves as the definitive contract for the sale of a business. It identifies whether assets or stock are being acquired and specifies exactly which items are included or excluded from the transaction. The agreement also assigns responsibility for any liabilities associated with the business, its assets, or equity interests. In addition, the purchase agreement outlines the process for transitioning ownership and operations to the new owner, including any post-closing assistance that the prior owner may provide to facilitate a smooth handover. Closing may occur immediately upon signing, or after a designated period to allow for further due diligence and the receipt of necessary third-party or governmental consents.
The purchase agreement will state whether the purchase price is paid over a period via cash or through other means, and whether monies will be held back from the purchase price.
Most importantly, the purchase agreement will often require the seller to make exhaustive representations and warranties (a/k/a promises) about the sale and the stock or assets being conveyed to the buyer. A well-drafted purchase agreement as to representations and warranties and indemnification responsibilities is vital to best protect the seller’s interests regarding post-closing liability to the purchaser.
From the seller’s standpoint, negotiating baskets and caps in the indemnification provisions and representations and warranties is crucial to managing post-closing risk. Baskets establish a threshold of losses before indemnification obligations are triggered, ensuring minor claims do not result in disproportionate liability. Caps serve to limit the seller’s maximum financial exposure, providing certainty and protecting the proceeds of the sale. Thoughtful structuring of these terms can significantly reduce potential future disputes and safeguard the seller’s interests throughout the transaction.
Given that the sale of your business, large or small, can be immensely personal, it is important to hire legal counsel that you are comfortable with and trust to see you through the process. Axley has a wealth of knowledge and experience in helping Wisconsin business owners sell their business and enter a new exciting chapter of their lives. Reach out today if you need help selling your Wisconsin business.