The sale of any small business is a complex and emotional process. The financial impact on individuals is usually very significant. If you do a good job of selling your small business it can be a large financial windfall. Done badly though it can completely disrupt your retirement planning.
Pay too much as a buyer and it can set you back many, many years.
There are many reasons why business sales and business acquisitions go badly or just don’t happen at all.
Amongst the reasons are;
- A lack of understanding about what legal documents to use and when, and
- Effectively using legal advice.
The advent of accessible, high quality, low cost legal documents and legal advice from Legal Vision really empowers small business owners. It enables them to get more value from their legal spend and a better end result from having a deeper understanding of what’s involved in the legal side of buying and selling a business.
In my experience many business owners have delayed their involvement in the legal aspect of a business sale until it is too late in the process and have, in effect, handed over complete responsibility to their lawyer. As a result the legal discussions, usually done at the pointy and emotional end of the process, often bring up technical and complex issues that can force the owner to unreasonably compromise. In some cases it can even derail the process.
To avoid these outcomes, you as the business owner need to become much more familiar with the documents that are involved and when to use them. This will reduce the number of surprises later and help you get more value from your legal advisors when the time comes to get their expert advice.
Following is a brief overview of some of the key documents involved in a small business transaction. It’s a very modest investment to make yourself familiar with what each of them involves.
A confidentiality agreement (CA or non-disclosure agreement or NDA) is an agreement between two parties (for example a seller and a potential buyer) that is entered into in circumstances where either or both of them will disclose confidential information in the course of their relationship.
It’s important to use a CA before you agree to provide certain information to any third parties. It will provide certain protections on how your confidential information is used by the other party.
At the other extreme though I see a common and recurring mistake. Just because you have a CA in place doesn’t mean that you freely provide whatever information a third party may request. While that information may be covered by the CA you should only be releasing information about your business in stages and to parties who you continue to assess as genuinely interested.
Heads of Agreement (or Term Sheet ) – Sale of Business
A Heads of Agreement (or Term Sheet) is a pre-contractual document that outlines the main terms and conditions of agreement between parties in relation to a proposed transaction (e.g. sale of a business).
The value of a well-constructed Heads of Agreement is that it documents key deal terms for both parties on a page or two. It’s a great time saver and a powerful way to work out if a party is genuinely interested and committed to the deal.
They are heavily underused. In an upcoming article in will go through how to use them effectively to save you time and isolate the genuinely interested parties
Sale of Business Agreement
In order to sell a business the seller and buyer need to document the terms under which the sale is agreed. This Sale of Business Agreement is a comprehensive document covering a range of legal and commercial issues. It is the single most significant legal document in a business sale.
Lengthy Sale of Business Agreements can and do overwhelm business owners. This is especially true if it’s the first time you have seen one and it’s at the end of the sale process and you are already feeling stressed and emotional.
With the complexity of this document, and the serious negative ramifications for getting it wrong, you will need quality legal advice. However if you can establish early on in the sale process a basic understanding of what’s in there then you reduce your personal stress later in the sale process. You will also make better decisions when the legal negotiations start. For many first timers it comes as a complete shock that, having reached and documented a commercial agreement, there are all these other “legal’’ issues to be negotiated. Warranties and guarantees are a great example.
A Non-Compete Agreement is an agreement between two parties whereby one party agrees not to compete with the other for a defined period in a defined area.
Many business sales will require the owner exiting the business to not compete with the new owner. Having paid you, the outgoing owner, for the business this is a normal requirement. The reasonableness of the terms of the non-compete need very careful consideration though. Typically the negotiations of the terms start late in the business sale process, and again in the heat of the battle when emotions are running high. This is not the time to be thinking about this for the first time. In a rush to sell the business you might be tempted to compromise here and agree to a longer than necessary period. Conversely buyers often use this clause as a negotiating tool. The best way to deal with non-compete is to address it earlier in the sale process. If you have a clear view of what’s reasonable, non-negotiable then the sale process will be more efficient and less stressful.
If you are planning to sell your business, get in touch with LegalVision. Call us on 1300 544 755 or get in touch with LegalVision’s business sale lawyers.