Selling a business is a complex process requiring extensive legal planning. To unlock the highest value at the lowest risk and make sure the sale goes off without a hitch, business owners have to prepare appropriately. The following are some vital legal tips to guide owners who are preparing to sell their business.

1. Legal Due Diligence: Preparing Ahead of Time

One of the most critical aspects of preparing for a sale is performing legal due diligence on your own company. This involves reviewing, preparing and organizing all legal documents and any legal information a potential buyer may request. Key documents to be compiled and reviewed include:

  • Company Documents: Ensure that all your company’s governance documents, including articles, by-laws, minutes of meetings and the unanimous shareholder agreement, are up to date.
  • Contracts: Gather all material contracts, such as vendor, customer, lease and employment contracts.
  • Intellectual Property: Verify whether intellectual property assets, such as trademarks, patents and copyrights, are properly registered, protected and owned by your company.
  • Permits and Authorizations: Gather the permits and authorizations required to run the business and verify that they are valid and issued in the name of the right entity.
  • Consents, Authorizations and Notices:
    • Confirm that the company’s material contracts are assignable by way of an asset transfer or that the company bound by the contracts may undergo a change of control or structure without a requirement that it give the counterparty notice or obtain its consent.
    • Verify what consents or authorizations must be obtained from government authorities, what notices must be sent to them in the event of a transfer of permits or authorizations necessary to operate the business or in the event of a change in control or structure of the company.

2. Confidentiality and Non-Disclosure Agreements

Safeguarding confidentiality is crucial throughout the entire sale process. Prior to disclosing sensitive information to potential buyers, have them sign a non-disclosure agreement. Non-disclosure agreements must protect confidential information and, in such context, must clearly define what constitutes confidential information and limit the use of such information by the buyer solely to the evaluation of the purchase. It is also very important that they include non-solicitation clauses barring potential buyers from soliciting your employees, customers and, in certain cases, your suppliers, during the evaluation and negotiation process and, should the sale not go through, during a period to be determined .

3. Structure the Transaction Carefully

The structure of the sale is a critical step for both tax and legal-related reasons and every structure has different tax implications and legal risks. Key considerations include:

  • Asset or Share Sale: Determine whether the sale will be structured as an asset or share sale. In an asset sale, the buyer acquires specific assets and liabilities from your company, whereas in a share sale, the buyer purchases your shares in the company, inheriting all of your company’s assets and liabilities.
  • Tax Planning: Consult a tax advisor to understand the tax implications of the sale. Adopt strategies to minimize the tax that will be payable.
  • Payment Terms: Negotiate favourable payment terms, potentially including a lump-sum payment, instalments and/or an earnout clause, in which case a portion of the purchase price is contingent on future performance.
  • Restrictive Covenants: Based on your future plans, consider the scope of the non-competition and non-solicitation covenants that you will be willing to accept.
  • Simultaneous Sign-and-Close or Signing and Closing at a Later Date: Depending primarily on the consent to be obtained and notices to be given prior to closing the transaction, some of which may depend on the identity of the prospective buyer, determine whether it’s advantageous for you to enter into an agreement and then close the transaction at a later date once a series of closing conditions have been satisfied or, alternatively, to sign and close the transaction concurrently.

4. Assess Liability and Risks

In addition, you may avoid negotiation issues if you have identified and settled potential sources of liability prior to the transaction. For example:

  • Litigation: If your company is involved in any disputes, consider settling them prior to the transaction. Pending litigation may put off potential buyers, reduce the purchase price or prompt the buyer to require that you bear the cost of the litigation or any eventual judgment or settlement.
  • Environment and Regulatory Law: Make sure your company complies with all applicable environmental regulations and statutes which are specifically relevant to your industry. Failure to comply may trigger fines or other sanctions that may complicate the transaction and result in consequences similar to those of litigation as described above.
  • Employees: Assess all risks involving your employees, such as any unpaid wages or employee claims. Consider having key employees sign non-compete and non-solicitation agreements if they have not already done so.

5. Prepare for the Transition

A smooth transition is key to business continuity after the transaction. Key considerations include:

  • Training and Support: Be prepared to offer transitional training or support to the new owner to allow it to understand the operations and retain key stakeholder relationships.
  • Clients and Vendors: Plan how you intend to transfer customer and vendor relationship knowledge to the new owner and handle their transition. In many cases, the seller may need to introduce the buyer to key customers or vendors to ensure a seamless transition. In such cases, consider a structure by which the signing takes place first and the transaction is closed on a later date.
  • Key Employees: If specific employees are key to the success of the business, consider offering them incentives to stay onboard after the sale. It may be relevant to involve the buyer in this process, as otherwise it may require you to  bear the cost of such incentives.

6. Bring in Experienced Advisors

Lastly, engage experienced financial, legal and tax advisors to guide you through the entire sale process. Financial advisors are accountants or investment bankers who can help you establish the value of the business, structure the transaction . Legal advisors are M&A lawyers who will help you draft and review all legal documents, negotiate their terms and ensure your interests are protected throughout the transaction. Your tax advisors will help you structure the transaction efficiently, determine any required pre-closing reorganizations and identify tax risks.