Key Legal Considerations When Selling Your Business

Most small business owners find that their company is their biggest asset, with a significant portion of their wealth wrapped up in the business. Selling your company is a huge undertaking, with the power to line your bank account and give you more freedom. While you might be focused on the price or buyer, there are other important considerations to weigh—namely, these legal issues.

What Are You Selling?

The answer to this question might seem obvious, but it rarely is. Corporations can sell assets, shares, or both. Selling shares confers greater tax benefits, though selling assets may offer more flexibility, and allow you to retain control over the business. You'll need expert help when deciding whether to sell asserts or shares, so work with a skilled accountant an attorney who specializes in M&A.

If you are not an incorporated business, selling assets is your only option.

The Value of Preparation

Buyers don’t care about your hard work. They care about how profitable your business is, and whether they can grow its value. So a little preparation is highly valuable. Make sure your legal agreements are all in one accessible location. Get your financials in order, and make sure your projections are realistic. If your financial documents paint a bleak picture, you may need to take some time to clean things up before putting your company on the market.

The Letter of Intent

Every sale should begin with a letter of intent. This is an agreement between the seller and the buyer outlining what will be sold, the price, and the terms each party must meet to move forward. This document is not binding, but it can set reasonable expectations and increase the odds of a successful sale. It also initiates the process of due diligence, and can help ensure confidentiality.

Draft an Airtight Confidentiality Agreement

Buyers can and will use the information they learn against you—especially if they are competitors, especially if the deal falls through. Through due diligence, the buyer will gain access to just about everything you know about your company. Protect this information with a well-written confidentiality agreement that establishes clear and specific penalties for leaking information.

Draft a Purchase Agreement

Once you and your buyer agree to terms, your attorney should draft a detailed purchase agreement that outlines the sale, what exactly is being sold, any remaining liabilities, payments, and how to allocate the assets. The deal is complete when you execute this purchase agreement. Minor changes in the wording of the agreement may greatly affect the deal, so work with a legal team who has significant M&A experience.