Business sales and purchases of any size are not decisions to be taken lightly. You can lessen the inherent risks associated with these kinds of commercial transactions by conducting adequate research, exercising due diligence, and relying on skilled personnel.
How to Mitigate Risks and Avoid Pitfalls in Business Sales
Protecting your company by proactively assessing prospective purchasers and the terms of the deal, addressing confidentiality, preparing for tax and legal structure consequences, and resolving transition issues before signing a sales agreement, will help you avoid typical pitfalls and keep your transaction on track as you consider selling a business.
Due Diligence is a Must
Both the buyer and the seller in a transaction should value due diligence. To minimize the chances that either party will not be able to carry out their contractual responsibilities, each party should thoroughly investigate the other.
This entails running background checks on the purchaser as well as the business’s owners and principals, including UCC, credit, and criminal record checks. If you are the seller, this step also ensures that prospective buyers have the financial means to purchase your company so that you don’t waste time on “tire-kickers” or those who are obviously unable to confidently come to the closing table.
Obtain a Confidentiality Agreement
A confidentiality (non-disclosure) agreement must be created and used as a crucial first step in the sale of a business. If the transaction is not completed, this agreement safeguards your company’s proprietary and sensitive information by specifically forbidding a prospective buyer from:
- Sharing discovery information with competitors
- Utilizing it to establish or expand a business that is akin to yours
- Recruiting or employing your staff
Legal Structure Decisions
Private company sales are frequently organized as either asset sales or equity transactions. The majority of privately owned companies are owned and run by an entity such as a corporation or limited liability company.
In an asset sale, the buyer of the business purchases nearly all the assets used in it as well as the goodwill connected to it, but not the entity itself. In order to avoid being saddled with an entity’s obligations that the seller may or may not have been aware of, buyers often choose to buy assets.
A stock or other equity sale entails the buyer purchasing the entity’s existing shares or equity holdings, making them the new owner of the entity itself, together with the business assets. To avoid being saddled with an entity’s obligations, which the seller may or may not have been aware of, buyers typically prefer asset purchases.
In an asset sale, a transaction agreement should specify how the purchase price will be divided among the assets being purchased. (e.g., allocating among equipment and fixtures, inventory, customer lists, business goodwill and, in some cases, post-closing consulting services). The buyer and seller must come to an agreement on this allocation because it could have a negative impact on their respective income taxes.
Prepare for Transition Issues
Avoid becoming too preoccupied with the sale of your business that you overlook the post-closing transition period. In general, it is the buyer’s decision whether to make a clean break or request the seller to remain on for a few months to assist with the transition and training.
However, if you are not fully cashing out and are offering the seller financing, it may be in your best interest to remain involved in the process to improve the possibility that the company will succeed and that you will be paid in full for the deferred portion of the purchase price.
The scope and conditions of any transition services, including the number of hours that will be committed and whether the cost of the services is rolled into the purchase price or a separate expense to the buyer post-close, should all be agreed upon prior to closing.
Partner with a Knowledgeable Legal Team for Business Sales
Even successful business owners have very little time or significant expertise to properly handle the complicated legal and financial issues involved in buying or selling a company.
If you need assistance with buying or selling a business, our attorneys at Apfelbaum Law are the experienced team you can lean on. Contact us today.
