Selling your business is a major financial and legal decision that requires preparation and research. The legal and financial aspects of the sale may be complex and require the advice of professionals who can evaluate the business and implement the legal structures for completing the transaction. Here is an explanation of some of the steps involved with selling your business:
Letter of intent. The Letter of Intent describes the terms of the sale and the structure of the transaction. The Letter of Intent may be binding or non-binding. If the Letter of Intent is non-binding, it simply indicates the desire to reach an agreement upon the occurrence of certain conditions. The Letter of Intent establishes the rights and responsibilities of the parties, allows the parties to agree on fundamental matters before entering into binding agreements and establishes safeguards if the transaction does not close. The buyer typically engages in a thorough review of the business (“due diligence”) once the Letter of Intent is signed.
Due diligence. Due diligence is the process of investigating and analyzing a company’s information prior to a sale or merger. The seller is required to provide the buyer with all relevant information, answer questions and inform the buyer about material information that is not evident or present in the documentation. Full disclosure can help the seller avoid any potential litigation in the future if the business does not succeed. This also means that the seller should have all important documentation accessible and current, including financial records, contracts, leases, sales data, inventory statistics, payroll information, customer lists and other relevant information. The seller should also conduct his own due diligence review of the buyer’s financial health. The seller should request credit information and other financial data, especially if the sale is being funded through seller financing.
Agreements. A seller should request a confidentiality agreement in the Letter of Intent to protect information that the buyer learns through his due diligence. A confidentiality agreement legally prohibits the prospective buyer from divulging or appropriating information that is discovered about the seller’s business (such as trade secrets or financial information). Finally, the parties must execute a purchase agreement for the sale of the business. A purchase agreement sets forth the terms of the sale, specifies the remaining liabilities and directs the allocation of assets, in addition to discussing other facets of the transaction. The purchase agreement also contains various representations and warranties about the business being sold and the conditions for closing that must be satisfied by the buyer and seller (such as obtaining necessary releases from third parties). The purchase agreement is generally lengthy and complex, and should be handled by an attorney.
Chernoff Law handles business and real estate litigation matters throughout Arizona. Contact us by calling 480-719-7307 to discuss your legal matter.