Selling a business is a complicated transaction that involves a great number of moving parts. Many people think they can skip out on hiring a lawyer to help with the process and this often proves to be a costly mistake. Selling a business without proper legal expertise can leave a business owner vulnerable to delays and confusion. Many sale transactions have even been called off completely due to issues that could have been avoided with the guidance of a qualified lawyer. Both buyers and sellers require their own legal representation.
There are four main areas of a business for sale transaction where legal expertise is required.
1. Purchase Contract
The buyer’s lawyer is the one who will draft the formal purchase agreement following the terms agreed to in a Letter of Intent signed by both parties, plus adding representations, covenants, and warranties. Terms include details such as the price, deposits, assets included, due diligence conditions, non-compete clause, closing date, as well as training and transition plans for after the transaction closes. The seller’s lawyer will review the drafted contract to ensure the agreement is written fairly for both parties and that their client is protected. Legal counsel for both parties is a must and without it a professional business broker will not be party in proceeding with the transaction.
2. Due diligence
The buyer’s lawyer has more involvement than the seller’s lawyer during the due diligence phase of the purchase process. The buyer’s lawyer will review documents such as contracts, the lease agreement, copyrights, and patents. The seller’s lawyer can help to prepare this documentation for submission to the buyer’s lawyer and can also advocate for the seller if they are maintaining any ownership of intellectual property after the sale is completed. Without legal advice during the due diligence phase, a seller may end up signing away rights or ownership they had intended to retain.
3. Financing arrangements
While financing the purchase of a business is the buyer’s responsibility, the seller must do their due diligence to ensure the arrangements are legitimate and legal. Depending on the complexity of the transaction, financing may be complicated and involve much more than simply handing over the agreed upon amount in liquid cash so a legal review is imperative to protect the seller. If there is vendor financing involved then the seller’s lawyer will be the one drafting the vendor financing agreement, establishing warranties and guarantees, plus conducting relevant credit checks.
Once all conditions have been removed, the sales transaction is firm and deposits are held in trust. Both lawyers will work together to finalize all paperwork including the bill of sale, lease assignment, transfer of funds, and paying out all fees and debts. The business broker is very involved throughout the process to make sure everything is kept on track, appropriate information is exchanged, and deadlines are met.
Not all lawyers are qualified to handle the complexity involved in facilitating a business for sale transaction. When looking for a lawyer to help during the sale of a business, look for one with experience handling similar transactions and check references. While it may be tempting to hire the lowest priced lawyer, doing so can cost more in the long run in terms of money left on the table or a deal that doesn’t cross the finish line. Ask your business broker for tips on what you should look for when hiring a lawyer. Hiring a great lawyer is an important investment that will help your business to sell successfully.