- The importance of due diligence when planning a business sale
- The types of sale that owners should consider depending on the business they are selling
- Why conducting proper business valuation is crucial when preparing for a sale
- Some of the legal aspects to keep in mind and analyze while preparing for a sale
Selling a business can be a complex and emotionally charged process.
Whether experienced or first-time, it is vital to consider all legal issues to ensure legal compliance and proper transfer of assets. Neglecting the legal aspects may not only turn away potential buyers but also turn out to be a costly mistake.
Selling a business is not all about finding a buyer and agreeing on a price. You also need to find a way through all the legal implications that can make the process strenuous and complicated.
Let’s explore the key legal factors you need to consider when selling your business to ensure a seamless transition.
Due Diligence
Anyone planning to sell a business must conduct thorough research and assess the business as part of the valuation process. Due diligence allows business owners to identify and rectify weaknesses and deficiencies in their business before proceeding with the sale.
A comprehensive business review serves to uncover and address any potential issues affecting the final price and the sale process. It also helps both parties understand the business’s financial health, operational procedure, market position, and legal obligations.
When conducting due diligence, there are four reviews that you must conduct:
Contract Reviews: Reviewing contracts the business has signed with clients and suppliers is vital to ensure the terms and conditions are fair, accurate, and aligned with the interests of both parties. While conducting due diligence, you should make sure that the legal agreements and the contract terms are robust and that legal and financial risks are reduced.
Intellectual Property Protection: Through due diligence, you should identify all existing business trademarks, patents, and other IP rights to generate maximum value from them. All the IP licenses should be up to date and adequately documented. In addition, the business owner should develop a plan for transferring the IP as part of the sale process.
Employment Agreements: Ensuring all employment agreements comply with the law for a smooth sale process is crucial while conducting a business review. Understanding the employment agreements, preparing them for sale, and addressing legal considerations can help protect the employees and the business’s future.
Regulatory Compliance: No serious buyer would want to purchase a business that does not meet all the regulatory requirements. In this case, a business owner should ensure the business has all the required licenses and keeps customers’ data safe before negotiating the sale price.
Structuring the Sale
When selling a business, attention should always be on a structure favorable to the final price, tax purposes, and other consequences. Before settling on a structure, you should analyze and consider the tax consequences and liability issues as part of the sale process. Generally, there are two methods for selling a business.
Asset Sale
- A sale structure whereby a seller audits all the business assets and values them to come up with an overall price for the sum of the assets.
- Tangible and intangible assets, including goodwill, consumer lists, contracts, office furniture, equipment, and real estate, are analyzed.
- Tax structure and income derived from an asset sale structure depend on the sold assets.
Stock Sale
- Ideal for any seller planning to sell the whole business entity, including all liabilities and assets.
- Buyers do not need to retitle the asset or look for new contracts as they buy the business.
- Transactions are taxed at a more favorable capital gains tax rate, but buyers cannot choose which assets or liabilities to absorb.
Valuation and Financial Disclosures
Valuation is another essential aspect when planning to sell a business. The process entails estimating a business’s worth upon analyzing its financial performance, assets, liabilities, and other factors.
- Asset-Based Approach: Values a business based on the value of tangible and intangible assets.
- Income-Based Approach: Estimates value based on the business's ability to generate profits.
- Market-Based Approach: Values a business by comparing it with similar businesses in the market.
When selling a business, valuation is also required for legal purposes such as taxation and estate planning. It also helps in dispute resolution in the future. Therefore, a thorough and proper valuation ensures compliance with legal requirements while protecting both parties’ interests.
As a business sales expert, Acquira understands how to value a business to ensure owners get maximum value without being squeezed. They will continuously operate in your best interests to guide you through a complex process.
Contracts and Agreements
Every stage of a business sale process should be documented to include all agreements and conditions in the final contract. The first contract a seller will likely sign would be with a financial adviser for tax and finance advice. Likewise, a seller could engage the services of a business transfer agent and sign an agreement giving them the right to approach potential buyers.
The seller’s solicitor will draw up a legally binding confidentiality and nondisclosure agreement. It is to be signed by all buyers before they receive a sales memorandum. The seller can share sensitive information about the business financial statements and its competitive edge in the sale memorandum.
Employee Considerations
A seller must ensure compliance with employment laws when selling a business. The minimum wage, working hours, and employee rights should be well articulated in the sale agreement. A potential buyer should be allowed to review all existing employment contracts, including restrictive contracts such as non-competition agreements.
In most cases, employees are expected to continue working even on a business being sold. Likewise, if the new owner decides against absorbing, the employees must be properly terminated, and all outstanding entitlements paid on or before the sale are complete.
Regulatory Compliance
How smooth the sale process would be, depends on whether the business complies with various regulatory requirements. For starters, the seller must resolve all outstanding tax liabilities before putting the business up for sale. In addition, they should provide accurate financial records.
On the other hand, buyers are required to verify their tax compliance status. Most buyers also conduct due diligence to ascertain whether a business complies with various environmental requirements. Therefore, a seller should ensure a business is compliant with waste disposal emissions and the use of hazardous materials.
Customer and Supplier Relationships
The seller’s responsible for ensuring the smooth transfer of customer and supplier contracts during a business sale. In some cases, the seller might have to seek consent from customers and suppliers to transfer them to the new owner. In addition, well-set frameworks should address any dispute involving the new owner and the suppliers or customers.
Confidentiality and Non-Disclosure Agreements
The sale of a business is a complex process that, at times, involves sharing sensitive information. Therefore, confidentiality is of utmost importance to avoid damaging the business' reputation or causing anxiety among employees, customers, and suppliers. Keeping the sale confidential also allows an owner to control the process and be in a position of strength in the negotiation process.
Therefore, it is essential to sign non-disclosure agreements with potential buyers to ensure details about the sale don't leak before closing. Sensitive information should only be shared with buyers who have signed an NDA. Likewise, it is advisable to use a broker that has extensive experience in selling businesses.
Regulatory Approvals
An owner is responsible for ensuring a business sale transaction complies with all the relevant regulations and laws. The process entails obtaining necessary permits and licenses depending on the business being sold. The owners must also ensure the business complies with all tax requirements and environmental regulations before affecting a sale.
Failure to ensure compliance with various regulatory requirements could result in significant penalties. For instance, failing to ensure tax compliance could result in the seller being hit with unnecessary costs. In addition, the business could be hit with penalties if it is not compliant with environmental regulations.
Dispute Resolution
Post-Closing Obligations
Even after a business sale transaction is completed, there may be certain obligations that both parties would have to fulfill. The obligations may be in relation to the statements of fact that the seller makes to persuade a buyer into a deal.
Therefore, it is the seller’s responsibility to ensure all the claims made during the negotiations come true once the deal closes. Such claims may involve the business's financial performance, legal compliance, and asset condition. If the statements are found to be untrue, the buyer might seek compensation.
Additionally, post-closing adjustments on the purchase price might be based on specific metrics such as working capital and net asset value. In addition, the buyer and seller might decide to indemnify each other should any liabilities arise after the closing date.
Case Studies/Real-world Examples
Selling a business requires proper planning and a deep understanding of the lurking challenges. Timing when to sell a business has always been one of the most extensive tests for anyone looking to generate significant investment returns. Factors such as changing market conditions, geopolitical risks, and economic trends can make it difficult to determine the ideal moment to put a business up for sale.
Additionally, deciding on the true value can be challenging, especially when owners emotionally attach to the business. In addition, navigating legal and regulatory hurdles often present significant challenges to business owners.
Engaging the services of legal experts and advisors specializing in business sales is a prudent move for any owner looking to remain compliant and avoid pitfalls when selling. Such professionals bring a wealth of experience and expertise to get through every step of the sale process.
Acquira is another one-stop shop for any person looking to navigate the challenging landscape while selling a business. Backed by a team of professionals, we're always ready to provide valuable insights, connections, and resources to make the journey smooth. In addition to determining the right time to sell, we also make sure you get a fair valuation and find the right buyer.
FAQs
Due diligence is crucial as it thoroughly examines a business’s financial records, legal documents, contracts, and personnel records. The process helps a buyer identify potential risks and benefits associated with the business.
Not considering the structure of the business sale and only focusing on the desired price has left most business owners with unnecessary costs once the deal closes. Therefore, it is essential to consider the amount of money one would pay on closing costs, income taxes, and other expenses before settling on the price.
While it is possible to sell a business even if it owes money, the prospects of ending with a good deal are usually small. Debts create risks that decrease business value. Therefore, reducing debts before attempting to sell a business is essential.
The time it takes to sell varies from one business to another, as well as how fast both parties can complete various steps. Right from valuing the business, finding an interested buyer, and negotiating the purchase price, it could take six to twelve months to complete the process.
Yes, selling a falling business is possible, but it will come with significant challenges. The process would be long and complicated, given the due diligence to be conducted for potential buyers to know what they are getting into.
A non-disclosure agreement is a legally binding agreement between a buyer and a seller that protects sensitive information, trade secrets, and intellectual property from being disclosed to third parties or misused during the sale process.
Conclusion
Selling a business is not all about finding a buyer and negotiating a price. It involves a myriad of legal processes and requirements that you must follow for a smooth process that’s legally binding. Knowing and adhering to legal requirements is vital as it impacts the outcome of the sale process and, in turn, the seller's and buyer's financial future.
Given that the process can be complicated and strenuous, it is important to engage the services of an experienced legal counsel to mitigate the risks and ensure a smooth process. A legal counsel will offer a way of navigating the jargon from legal to regulatory compliance while ensuring you ends up with a deal that makes financial sense after years of investments and hard work.
Are you a small business owner looking to get the most out of your sale by reducing your tax liability and navigating regulatory requirements? If so, reach out to Acquira for a FREE business valuation to see how our industry professionals could help you get the most out of your exit.
Key Takeaways
- Selling a business requires addressing various legal issues before, during, and after the sale.
- Due diligence helps both parties evaluate the business and identify any problems or risks.
- The sale structure affects the tax, asset, and liability transfer, and business price.
- Valuation helps to find the market value of the business and serves legal purposes such as taxation, estate planning, and dispute resolution.
- Contracts and agreements define the sale terms and protect both parties’ interests and rights. They include confidentiality, employment, customer, supplier, and regulatory agreements.
- Other legal aspects to consider and analyze are employee, regulatory, customer, supplier, confidentiality, and post-closing issues.
- Selling a business can be complex, challenging, and requires legal and financial experts. Acquira can help business owners with the legal process and the best outcome.
Acquira specializes in seamless business succession and acquisition. We guide entrepreneurs in acquiring businesses and investing in their growth and success. Our focus is on creating a lasting, positive impact for owners, employees, and the community through each transition.
