Planning for the Sale of Your Business
Selling a business may sound like a simple concept, in theory. Put in the simplest terms, you and a purchaser sign a contract, the purchaser pays you, and you each sign closing documents transferring the business to purchaser. However, there are several issues to sort out before you ever make it to the closing table, which is why you should have legal counsel in your corner to guide you through the process. Some common issues that need to be ironed out include how payment will be financed, whether it will be an asset sale or a sale of the owner’s interests in the company, what representations and warranties seller is making and therefore liable for, and post-closing terms such as non-competition and non-solicitation clauses.
In most cases, and ideally from a seller’s perspective, the purchaser will pay a lump sum at closing to purchase the business. The funds may be derived from a commercial loan that the purchaser obtains from a bank or paid in capital that the purchaser already has available. However, sometimes parties agree to utilize an alternative method that is referred to as seller-financing. This typically involves the purchaser paying the seller a portion of the purchase price, and the seller issuing the purchaser a loan for the remaining balance of the purchase price. In such cases, the purchaser will execute a promissory note payable to the seller, and the seller will request collateral from the purchaser to secure the note.
Common examples of collateral in seller-financed deals are (i) a deed of trust recorded against real property (if real property is being conveyed as part of the transaction, or if the purchaser offers some of its own real property as collateral), (ii) a security agreement for a lien against either the assets or interests in the company that are being sold (in the event the purchaser defaults on the loan, the seller has a right to take back the assets or interests that it sold), or (iii) a personal guaranty executed by either the principals of the purchaser or other individuals.
Another issue that commonly comes up in business sales is non-competition and non-solicitation clauses. If the seller is selling their business because they plan on retiring, this is much less of an issue since they intend to stop working and sail off into the sunset. However, if the seller plans on continuing to work, whether by way of being employed somewhere else or using the sale proceeds to start a new venture, the terms of non-competition and non-solicitation clauses are crucial and need to be negotiated carefully.
Common restrictions included in non-competition and non-solicitation clauses are (i) prohibitions of seller participating in a similar business, typically for a certain period and within a certain geographic area, and (ii) prohibitions of seller soliciting employees and customers of the business. From the seller’s perspective, it is better for these restrictions to be more narrowly defined and less restrictive (less years and smaller geographic area, for example). On the contrary, purchasers usually push for broad restrictions (more years and larger geographic area, for example).
These are just a few examples of important issues to consider when contemplating selling the business you have worked hard to build. If you are looking to sell your business, we recommend consulting our business law attorneys to determine the course of action that best fits your specific situation.