Common Legal Issues in the Sale of a Business

Initiating the Sale of a Business

The initial steps in selling your business include the preparation of certain key documents and the production and review of any and all records relevant to the companies’ operations.

Confidentiality Agreements

Prior to reviewing information about the company, a would-be buyer must sign a confidentiality agreement.   Confidentiality agreements attempt to prohibit the buyer from using non-public information disclosed about your company for any purpose other than to determine whether to purchase the company.    A good confidentiality agreement will contain several key provisions, such as a non-solicitation clause prohibiting the buyer from soliciting or hiring any of your employees for a reasonable period of time, e.g. one year.   The confidentiality agreement may also provide for liquidated damages, injunctive relief and attorneys’ fees in case the would-be buyer uses the confidential information.

Letters of Intent

If a buyer is interested in making an offer, it will commonly prepare a letter of intent or “LOI.” The letter of intent summarizes some, but not all, of the material terms of a proposed sale.  It is not meant to be a binding contract but, rather, an indication of the basic terms of the proposed deal.  The letter of intent should include the purchase price, terms of payment (e.g. cash, promissory note, stock), and whether the sale will be of the assets or of the stock in the company being purchased.  The letter of intent usually provides for certain contingencies, such as those related to financing, and always contains a due diligence term that allows the buyer to walk away if it discovers unfavorable information about the company to be purchased.   Issues sometime arise as to whether the terms of an LOI are binding.  This problem can easily be avoided with the proper language.

Due Diligence

Due diligence is the process wherein the buyer examines every aspect of the business it proposes to buy.  This typically takes several weeks or even months.   The seller may also engage in limited due diligence of the buyer to determine, for example, the credit-worthiness of the buyer and its reputation in the industry.   Most of the burden falls on the seller, which will be required to produce what sometimes feels like a never-ending list of documents relating to every aspect of the company’s operations.   It is essential that the due diligence documents be prepared and thoroughly reviewed by the seller, its attorney and accountant prior to listing the company for sale in order to avoid any unnecessary delays.   Many financial and strategic buyers review hundreds of deals before making an offer and will quickly lose interest in a company whose records are not in order prior to offering itself for sale.

Due diligence documents include all of the following and more:  any and all corporate or LLC documents;  minutes of all meetings; memoranda, reports and analyses about the company; appraisal or other valuations of the company; organization chart, employee handbooks, confidentiality and/or non-compete agreements, pension or profit-sharing plan documents, bonus, incentive and stock option plans and other documents related to employee benefits; contracts with all vendors, suppliers and other outside persons or entities; standard company business forms; lists of personal and real property owned by the company; tax records; list of intellectual property; list of all company debts; information about any past, pending or potential litigation including settlement agreements, court orders, or judgments; insurance records; tax records; complete financial records for the past three years.

Contact Denver Business Lawyers for assistance.