This is the final part of our series discussing the sale of a business from the seller’s perspective. We’ve covered commencement of a potential deal through the closing and discussed certain post-closing items (primarily indemnification). To wrap up, we’ll recap some of the major items we’ve discussed and some of the tips we’ve provided.
In Part 1, we started with a discussion of two basic types of transactions, asset sales and stock sales, and noted the potential for different tax consequences and how transaction structure affects risk allocation. We suggested sellers get advisors involved early in the process to, among other things, consider the transaction structure.
In Part 2, we discussed seller financing and noted the significant risk involved with sellers accepting promissory notes from buyers. We suggested sellers do some investigation of buyers (evaluate creditworthiness) when seller financing is involved and consider asking for protections such as collateral, guaranties, and covenants from the buyer and/or its owners.
In Part 3, we discussed earn-outs and noted their potential for added complexity. We suggested sellers keep earn-out terms short, carefully consider the earn-out measure (e.g. revenues or EBITDA), and consider their ability to control or influence the business after closing and during the earn-out period.
In Part 4, we discussed the letter of intent (“LOI”), which usually starts the deal process. We suggested sellers will get the maximum benefit of the LOI by including not only the major business points but some of the legal points that will be important too. We also suggested sellers be very careful to delineate the binding and non-binding provisions and be aware of the expectation setting that naturally occurs during negotiation of the LOI.
In Part 5, we discussed due diligence and suggested that sellers consider doing a pre-transaction review of books and records before starting the deal process to clean up and organize items a buyer will want to review. We also noted the importance of protecting confidential information and gave several practical tips for responding to diligence requests from buyers.
In Part 6, we started discussing the definitive deal document (i.e. the asset or stock purchase agreement) and provided three important tips: clearly defining the interests to be sold and or retained, carefully describing the purchase price and other consideration, and clearly defining the closing event.
In Part 7, we continued our discussion of the purchase agreement by focusing on negotiations of some typical representations and warranties that a seller would be asked to give. We suggested that sellers consider who should give the representations and warranties (the selling entity and/or shareholders), discussed the importance of narrowing representations and warranties and the effect this has on risk allocation, and discussed the importance of producing adequate disclosure schedules.
In Part 8, we discussed pre-closing covenants and conditions to closing and suggested that sellers should carefully consider these items to avoid giving a buyer “walk rights” and to maximize the likelihood that the deal closes.
In Part 9, we discussed the closing process and provided some practical tips, including using checklists, getting third-party signatures in advance, double checking wiring instructions, and coordinating schedules of everyone who needs to sign documents for the closing.
In Part 10, we began discussing indemnification, one of the more esoteric yet important points concerning a deal. We discussed the inter-relationship between representations and warranties and indemnification and noted the importance of reviewing these sections very carefully. We also discussed the importance of carefully reviewing retained liabilities.
In Part 11, we finished our discussion of indemnification by discussing deductibles and caps, the term of the indemnity, the importance of making indemnity the exclusive remedy, and limiting the type of recoverable damages.
In Part 12, we discussed some of the more important ancillary agreements, including non-competition agreements and employment agreements. We noted the importance of carefully reviewing and limiting restrictive covenants and some of the basic employment or consulting agreement terms.
In conclusion, selling a business is a very complex process and is often subject to intense negotiation. Wise sellers will do some homework in advance to understand the process and engage experienced advisors to help.
This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.
