Selling your business is no simple task. It’s not like selling a car or some old furniture where you can just post them on Craigslist when you are done with them. There are a wealth of legal and financial considerations to be made when selling a business, which means there is going to be a LOT of paperwork.
Every document that goes into the sale of a business serves an important purpose that’s meant to help ensure the fairness and legality of the transaction. Every business sale is also unique, and can incorporate vastly different legal documents and contracts. In this blog, we will detail four vital legal documents that will be used in nearly every business sale, but keep in mind that this is just a very small sampling of the paperwork you will likely need to sell your company.
Letters of Intent and Term Sheets
These are typically initial documents in a business and sale. They are preliminary documents that serve the similar purpose of detailing the intentions of both the buying and selling party in a business sale. Neither of these documents are usually binding, though there are instances when they can be, or when certain portions of the documents can be. They are important, however, because they can help ensure that you and the buyer are on the same page with regard to the terms of a sale. Since they are preliminary and nonbinding, they also allow time to negotiate if there are differences of opinion or understanding about the sale. The main difference between the two is that a letter of intent is generally written in a more formal letter style, while a term sheet simply lists the terms of a future sale in bullet points or abbreviated form.
The confidentiality agreement, also known as a nondisclosure agreement, is one of the most commonly used contracts in business, and the sale of a business is no exception. Throughout the process of selling a business, all parties involved will be exposed to sensitive information that the seller would not want shared with outside parties in case the sale doesn’t go through, and the buyer would not want shared with outside parties in case the transaction is finalized. The exact terms of your confidentiality agreement will vary based on the specific circumstances of the sale, but nearly every business sale will need a confidentiality agreement at some point.
Most business sales will require the selling party to sign a non-compete agreement which requires them to refrain from participating in or create a competing business for a specific duration of time after the sale. However, in order for the non-compete agreement to be valid, it must be reasonable under the law. Courts typically weigh geographic restrictions against time limitations. The greater the geographic restriction, the shorter the time limitation that will be permitted by a court and visa versa. For example, where a ten year, world-wide non-compete would likely be impermissible under most circumstances, a ten year non-compete in a one mile radius around a business would more likely be upheld. In addition, the restrictions must bear
some relevance to the seller’s business. For example, it would likely be considered reasonable for the buyer to restrict you from competing nationally if the business being sold is national, but not if it is only regional or local. It is important that, as the seller, you understand exactly how limiting the non-compete agreement is, and how much you are willing to give up to sell your business.
Purchase and Sale Agreement
This document is by far the most vital to any business and sale. This comprehensive legal agreement details nearly every aspect of the terms of your sale. As opposed to the letters of intent or term sheets, the purchase and sale agreement is the legally binding contract that allows you to execute the sale of the business. It will identify what’s being sold, it will state the purchase price, it will include any closing details for the sale, and most significantly, it will contain a host of representations and indemnifications designed to protect you after the sale has closed. Once again, the contents of this agreement can vary drastically from sale to sale, so it will be essential for you to use an attorney to guide you in drafting a sale agreement that will protect your interests in the transaction.
While we hope this blog is informative, it is not intended to serve as legal advice for your specific situation. If you are interested in selling your business, you need to consult with an experienced and knowledgeable business attorney, like those at Brown & Sterling, who can help analyze your goals and needs, and advise you on exactly what documents are needed for your transaction.
Please contact Brown & Sterling today to learn more about the documents you will need sell your business, and to learn how we can help.