The sale of any small business is a complex and involved process, carrying significant financial impact. A successful business sale can result in a large financial windfall. However, a business sale that does not go as planned can have severe financial consequences, including potential disruption to your retirement planning. When selling your small business, you must execute different legal documents, which may be confusing to understand. This article will explain what legal documents you will need for a small business sale. 

Selling Your Small Business

There are many reasons why business sales and business acquisitions go badly or just do not happen at all. Amongst these reasons are:

  • a lack of understanding about what legal documents are required and when, 
  • failing to seek proper legal advice; or
  • engaging a lawyer too late in the sale process. 

Many business owners often delay their engagement in the legal aspect of a business sale until it is too late in the process. In doing so, you risk handing complete responsibility over to your lawyer. Consequently, you may leave important legal discussions to the final, often emotional, stage of the process. This delay can bring up technical and complex issues that can force you to compromise unreasonably. In some cases, it can even derail the entire sale.

Familiarity with the legal documents required in a business sale can help make the selling process smoother for you. Likewise, an in-depth legal understanding can encourage a more favourable final outcome. A deeper understanding of the documents involved will also allow for more purposeful planning of and progression through the sale process. This can help to reduce the number of surprises throughout the process. 

Set out below is an overview of some of the key legal documents you will need for a small business sale.

Confidentiality Agreement

A confidentiality agreement (CA) or a non-disclosure agreement (NDA) is an agreement between two parties, where either one or both of them will disclose confidential information in the course of their relationship. As a seller, you may wish to enter into a confidentiality agreement with any potential buyers. It is essential to use a CA before you agree to provide certain information to any third parties. It will provide certain protections on how the other party uses your confidential information.

However, it is important not to overestimate the protections established by a CA. Just because you have a CA in place, it does not mean that you should freely provide whatever information a third party may request. While the CA may cover that information, you should only be releasing information about your business in stages and to parties who you continue to assess as genuinely interested.

When drafting a CA, there are templates you can follow. However, it is good practice to engage a lawyer to ensure your CA adequately covers the information you are seeking to protect.

Heads of Agreement (Or Term Sheet ) – Sale of Business

A Heads of Agreement (or Term Sheet) is a pre-contractual document. It outlines the main terms and conditions of an agreement between parties concerning a proposed transaction, for example, a 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 is a great time saver and an effective way to work out if a party is genuinely interested and committed to the deal.

More information about term sheets can be found here.

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. However, lengthy Sale of Business Agreements can and do overwhelm business owners. This is especially true if either buyer or seller have not previously worked with a Sale of Business Agreement.

It is crucial to seek quality legal advice in either drafting or to review your Sale of Business Agreement. Given the complexity of this document, there are serious negative ramifications for getting it wrong. It is best practice to establish an understanding of what is included in the agreement before the sale reaches its final stages. By doing so, you will only reduce stress in finalising the sale. Likewise, you will also better approach negotiations throughout the entire process. By becoming comfortable with some of the more ‘legal’ concepts in a Sale of Business Agreement, like warranties and indemnities, you will reduce the likelihood of unwanted sticking points in the latter stages of the sale.

Non-Compete Agreement

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. Following receipt of payment, it is commonplace for the outgoing owner to be bound by a Non-Compete Agreement. However, the reasonableness of the terms of the non-compete requires careful consideration. 

Unfortunately, the negotiations of the non-compete terms often begin in the final stages of the sale, when emotions are high. This is not the time to be thinking about non-compete provisions for the first time. At this point, it may be tempting to compromise to secure the sale and agree to a longer than necessary non-compete period. In this sense, buyers often use this clause as a negotiating tool. The best way to deal with a non-compete agreement is to address it as early as practicable. If you have a clear view of what is reasonable and non-negotiable, then the sale process will be more efficient and less stressful.

Key Takeways

Selling your business is a complex process, which involves many technical, legal documents. Without a deeper understanding of what is legally involved in the selling of a business, you risk derailing your sale. It is best practice to engage a lawyer to draft or review your legal documents. Relevant legal documents include:

  • confidentiality agreements;
  • heads of agreements; 
  • sale of business agreements; and
  • non-compete agreements.

If you require assistance in selling your business, contact LegalVision’s business sale lawyers on 1300 544 755 or fill out the form on this page.