Protecting Yourself When You Sell a Business

The sale and transfer of a business involves four specific steps:

  • Preparation for the sale
  • Negotiation of terms
  • Due diligence
  • Preparation and execution of documents

Preparation for Sale

Before you sell a business, you have to decide what you want to sell, and what price you want for the business.

The sale of a business can be an asset sale, an entity sale, or some combination of the two. With an asset sale, you typically purchase only the business assets, but do not take on any unknown liabilities. With an entity sale, you obtain all rights to assets, income, good will and other benefits of the company, by you also assume all debts and obligations.

If you have significant knowledge of the business and the market, you may have a good understanding of what your business is worth. Most often, though, it’s best to have a business appraisal expert give you an opinion on its value.

Another key component of preparing your business for sale is to get all business documents, agreements, filings and other matters in order. If your by-laws require a resolution to put the business on the market, make certain you have one in place. You can expect that most serious buyers will want to thoroughly review internal company documents before negotiating a deal.

Finally, it is customary to prepare a “selling memorandum,” essentially an advertisement for the sale of your business. This document is designed to give prospective buyers accurate information about all aspects of your business, such as financial strength, management, products and services, employees, and prospective price. Typically, any prospective buyer who reviews the selling memorandum will sign a confidentiality agreement.

Negotiating the Deal

Generally, you can include almost any provision in the terms of sale, provided it does not constitute an unlawful restraint of trade, does not violate any law, or is not contrary to public policy. However, you want to pay close attention to the following provisions:

  • The purchase price
  • Financing terms, including interest
  • Any representations or warranties made by either party
  • Any existing encumbrances on property, such as office leases or mortgages

Once the terms are negotiated, you will typically enter into a “letter of intent,” subject to a due diligence review by the prospective buyer.

Due Diligence

During the due diligence phase, the buyer will be given the opportunity to verify that all representations are accurate. This will likely include an inspection of the physical premises, as well as company books and financial records, including accounts receivable. The due diligence conducted by the buyer customarily also includes:

  • A review of all potential legal issues
  • A valuation report by an appraiser or certified public accountant
  • A review of all customer, vendor and supplier agreements and relationships
  • A review of all tax matters related to the business

Documenting the Sale

Once due diligence is complete, a purchase agreement must be drafted and signed. The purchase agreement sets forth all the details of the sale, including:

  • The parties
  • The type of sale
  • The price and method of payment
  • Any contingencies prior to transfer
  • The date of closing
  • Any representation made by either party
  • Any prohibitions on future competition
  • Any confidentiality requirements

Depending on the type of sale and how it is financed, you may also need promissory notes, security agreements, stock certificates and corporate resolutions.

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