10 Things About Selling a Business

  1. What are You Selling?  Early in the negotiations, buyer and seller must agree on what is being bought and sold—company stock (or other equity interests) or business assets.  Ordinarily, seller would prefer to sell the company stock, because that will make unknown company liabilities buyer’s problem (subject to seller’s indemnification commitment). However, seller might favor a sale of business assets because getting the cooperation of all the stockholders and option holders might be difficult.
  2. Don’t be Coy.  Be open and honest in responding to buyer’s due diligence investigation requests.  Every company has taken shortcuts along the way which it doesn’t want to disclose, but the consequences for misleading buyer are much worse.  Expect to put a lot of time and work into responding to due diligence, have a good Non-Disclosure Agreement, and let buyer have at it.
  3. The Straight and Narrow.  Avoid general, open-ended representations and warranties in the sale agreement.  Certainly, there are some issues for which seller “should know,” and reps about these issues are just about risk allocation.  But whenever you can get away with it, seller should keep its reps and warranties as narrow and focused as possible.  “To seller’s best knowledge” is a welcome (if rarely accepted) qualifier.
  4. Run Out the Clock.  Seller should expect to indemnify buyer for costs or losses resulting from the inaccuracy of seller’s reps and warranties.  However, the obligation to indemnify buyer should not go on forever.  Seller should limit the time period for its indemnification as much as possible.  Often, different indemnification periods will be appropriate for different potential liabilities.
  5. Taxes as Usual.  Sale of the business will likely result in a lot of taxes.  There’s capital gains tax on the sale of the stock or business assets, which could be quite high if basis is low.  Seller is responsible for his or her own capital gains taxes, but responsibility for other taxes is negotiable.  Seller and buyer should agree on responsibility for sales taxes, documentary stamp taxes, or intangibles taxes, if they apply.
  6. Delayed Gratification.  Seller would love nothing more than getting a big check at the closing table, but buyer might insist on holding back part of the purchase price.  This might be because an accurate value for the business cannot be determined until all the numbers are in for a given period.  Holdbacks are sometimes reasonable, but seller should insist that the money be place with an impartial escrow agent.
  7. Something for Nothing.  Remember how happy your employees were when they got those stock options?  Don’t expect them to remember now.  Unless they’ve completed the “incentive stock option maneuver” perfectly, your employees are going to have a big tax bill on the exercise and sale or redemption of their option stock.  And they won’t be happy if they have to wait on a holdback either.
  8. Unbind the Ties.  Most business owners, when the business is growing, are required to personally guaranty every bank loan, trade credit, and other obligation of the business.  Seller must be sure to negotiate a release of all of those personal guaranties as part of the sale.  If a creditor refuses to release seller, buyer should at least indemnify seller for liability resulting from the personal guaranty.
  9. Trust But Verify.  Often buyers will want to pay part of the purchase price in installments over a period of time.  Now seller needs to be the cautious trader.  Seller must conduct its own due diligence investigation of buyer’s ability to pay.  Buyer’s obligation should be documented in a promissory note (on which doc stamp taxes are paid) and secured by the purchased stock or assets.
  10. A New Hat. Buyers often insist on seller’s continuing to work or consult for the business for a period of time.  This requires a separate agreement between buyer and seller, which should be fully negotiated and documented at the time of closing on the sale.  Especially watch out for non-competition restrictions.

Leave a Reply

Your email address will not be published. Required fields are marked *