It is essential to be aware of the various legal aspects of the sale of a business to avoid potential problems. Six steps will help you work through the process and ensure that both the buyer and seller are protected.
Step 1. The Letter of Intent
Before you sell your business, the first step is to create a letter of intent. This is a non-binding document that describes the terms of the transaction. It can be written by either the seller or the buyer. It can also contain details such as the purchase price and the due diligence terms.
This document helps weed out potential time-wasters and ensures the deal goes through.
However, the deposit can be returned if the purchase does not proceed. A buyer can use a proposal to buy a business to secure a loan. This document can also serve as the basis for the purchase agreement, written by the seller and the buyer’s lawyers.
Step 2. The buyer is doing research
Before the buyer can start their due diligence process, the seller must provide them with their company documents. After signing the letter, the buyer will begin their due diligence. This process will involve conducting various financial and legal checks.
During this step, the buyer will conduct comprehensive research about the company they plan to buy. They will look at various details such as sales reports, customer records, and financial reports. This step is carried out independently by the buyer. The seller must also provide all the necessary documents to allow them to make an informed decision. If the buyer sues you after the sale, you will be protected by a due diligence clause.
Step 3. Purchase Agreement
An M&A attorney usually drafts a purchase agreement after the parties have signed the letter of intent. Since both the buyer and seller have completed the due diligence, the deal is expected to close soon. The purchase agreement is the key to the successful completion of a deal, as it legally binds the parties to the agreed-upon terms. Once the buyer has signed it, they must proceed with the purchase
Step 4. Payment Methods
A common way to finance a business purchase is through a seller financing deal. However, this arrangement is usually not the best choice for the seller. In this type of deal, the buyer will pay you every month.
If the buyer fails to make the payments on time, you must go through a legal process to get the business back. Your attorney and M&A advisor will recommend a payment type that is more acceptable to both parties.
Step 5. Know Local State Laws
Every state in the US has its own set of laws that govern the process of a business sale. These laws ensure that both the buyer and the seller follow the necessary steps before the deal closes. Failure to comply with these laws can result in a huge fine and the cancellation of the agreement.
This is especially important if the business is a corporation, as it has a board of directors that must be consulted. In certain states, the seller must prove that the company does not have to pay sales taxes. In addition, other taxes may be included in the purchase agreement. If you are not sure about the applicable laws in your state, contact an M&A attorney.
Step 6. Transferring Business Ownership
After completing all the necessary steps, you can move on to the next step, the transfer of ownership. This process involves signing several legal contracts that will allow the buyer to officially transfer ownership of the business. Following the completion of the legal steps, the buyer and the seller are required to sign the final contract, which formally transfers ownership of the company.