By UpCounsel Contributor 

As the owner of a business or the leader of a company you have significant experience in managing multiple tasks at once. Once you reach the milestone of planning to sell your company or accepting an offer to purchase some or all of the shares of your company, there will be new and competing demands on your time outside of the day-to-day business operations. However, business operations need to continue running as smoothly as possible during the sale phase of your company’s life cycle.

This article will provide a guide that company founders or leaders and their management teams will need to consider when planning to sell the company. Key areas for consideration are:

  • Why are you selling or exiting the business?
  • Should you structure the deal as a stock sale or asset sale?
  • How do you want to be compensated?
  • Creating a seller’s documentation packet
  • Preparing for substantive due diligence
  • Understanding the basics of the Sale and Purchase agreement

Why are you selling or exiting the business?

The sale or exit of a business is both a quantitative and qualitative endeavor. The “why” behind the sale of the business is the narrative of your journey as an entrepreneur or the leader of the company and where a sale fits into the company’s business plan.

Should you structure the deal as a stock sale or asset sale?

In a stock sale, the buyer acquires the seller’s legal entity. Therefore, all of the target company’s liabilities are transferred to the buyer unless negotiated otherwise, including contingent and any future liabilities.

Contrast the above with an asset sale, in which the buyer specifies which assets it will acquire in the purchase agreement. The buyer also enjoys protection by being able to choose which, if any, of the seller’s liabilities it will assume. Buyers often prefer asset sales for this reason.

However, it’s important to note that there are federal and state “successor liability”exceptions that vary by jurisdiction and can hold buyers responsible for liabilities under certain circumstances.

How do you want to be compensated?

Will you expect a cash payment and walk away from the business or business line?
Will you maintain some share of ownership or continue to work in a leadership or advisory role for the company?

Creating a Seller’s Documentation Packet

The documentation packet should contain an outline of your sale proposition, including existing client makeup and key financial information about the company

Preparing for Substantive Due Diligence

  • Ensure all corporate formation documentation is in order
  • Ensure share ownership of the company is properly documented
  • Ensure key contracts are catalogued
  • Know which contract terms are expiring and existing
    contract lengths
  • Confirm all regulatory licenses and approvals are up to date
  • Confirm all taxes are paid to date
  • Confirm no litigation is outstanding
  • Confirm there are no outstanding environmental issues
  • Confirm the status of any leases for real property that are part of
    the sale
  • Confirm all assets and liabilities of the company

Understanding the Basics of the Sale and Purchase Agreement (SPA)

While every sale or acquisition is different, an owner who has never been involved in the sale of a company should take time to understand the basics of the SPA.
Some SPAs are 100 pages; at the other end of the spectrum, transactions can have SPAs of 10 pages.

The length of the SPA is largely dependent on the size and complexity of the business, the assets and liabilities of the business and the financing method of the transaction.

Representations & Warranties

This section includes details such as who is making the representations on behalf of the seller and for what period they are being made.

Information supporting the representations made by the seller is provided in disclosure schedules.

The information and language in this section must be accurate and clearly worded. If not, the buyer may delay or terminate the deal, or the seller may be forced to indemnify the buyer.

Indemnification Section

Specific points addressed when negotiating indemnifications include:

  • The actions to be indemnified
  • Size of the indemnification
  • Which party indemnifies whom
  • Length of the indemnification period
  • Caps or limits on indemnification
  • Materiality thresholds detailing what rises to the level of requiring indemnification

During the sale process the goal from the perspective of the company founder or management team should be to work with their legal adviser to put a process in place that will allow business operations to continue uninterrupted while the sale process occurs. By thinking through the issues above during the planning stage of a sale, the transaction will have a solid foundation to ensure that it can be completed as quickly as possible, whether the deal is structured as a traditional sale of the company or an asset purchase.

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