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Top 10 Legal Requirements for Selling a Business

What are the legal requirements for selling a business? Are you about selling your business and you want to know the legal requirements and protocols involved? Then i advice you read on. Selling a business is tough and time consuming. Once you have decided to sell your business, you want to get the deal done quickly and move on to other projects as soon as possible.

Unfortunately, however, this is no good approach. You need to spare enough time when selling a business to ensure that every aspect of the deal is perfectly handled. There are certain requirements or conditions that you need to consider when selling your business. And you must ensure that your business sale agreement with the buyer is in relation to these issues.

Legal issues are very important as far a business is concerned. In fact, they are one of the most important aspects of a business. Sweeping any of the important legal aspects of buying and selling a business under the carpet could lead to unfavorable consequences for either the buyer or the seller. This explains why all the legal requirements for selling a business must be met before the deal is finalized.

Now, what are the legal requirements for selling a business? Read on to find out 10 of the most important ones.

Top 10 Legal Requirements for Selling a Business

1. Letter of intent

This is a straightforward document that highlights the fundamental terms of the transaction, such as the type of purchase (shares or assets), list of assets to be purchased, purchase price, a closing date, and certain conditions of closing. The letter of intent will also contain provisions of confidentiality to ensure that all information as given by the seller about the business are correct.

There are two types of letters of intent:

  • The binding letter of intent
  • The non-binding letter of intent

A non-binding letter of intent does not compel both parties to complete the deal, but a binding letter of intent makes it obligatory upon both parties to seal the deal.

2. Non-disclosure agreement

This is a document that prevents the potential buyer from disclosing confidential information about a business that the seller considers too vital to be leaked. It also helps to prevent the duplication of the company’s ideas by the potential buyer.

The potential buyer usually has the right to inspect every part of the business and back out of the deal if he or she discovers something unfavorable about it. However, a non-disclosure agreement will prevent him from disclosing any information learned during the inspection process.

3. Fundamental terms of the purchase agreement

Whether you have agreed to the sale of assets or shares, both parties will need to enter into a more extensive purchase agreement that will contain all the terms and conditions of the deal. In the agreement, the seller is required to give details and representations about the business to be sold.

These details are statements of fact as to the status or condition of certain items, such as the inventory, customers, equipment, suppliers, employees, contracts, leases, financial statements, taxes, and lawsuits. The buyer also wants to be sure that the assets you want to sell are free of third-party claims.

4. Statutory requirements

You are required to comply with all statutes that apply to the process of selling your business. For example, asset sales will be subject to the provisions of certain laws, depending on the size and nature of the transaction as well as the location of the business.

5. Finalization of the fate of employees

One of the legal requirements of selling a business is to decide what happens to your employees when you sell your business. In the case of a share sale, your employees will remain with the business even after the close of the transaction. And the buyer will inherit the control over your employees.

However, the buyer may state that they do not want to take one all or some of your employees and may leave you to terminate their employment. In such case, you are required to provide notice of termination of such employees or payment in lieu of notice.

6. Employee contracts

If the buyer wants to retain your employees, as is the case in a share sale, you will need to provide the contract that binds the employment of each employee. This will ensure a smooth relationship between them and the new buyer, since the buyer will be able to understand the conditions under which they were employed in the first place.

7. Supplier contracts

If the business to be sold manufactures products or for some reason depends on suppliers of certain goods, all contracts and agreements binding the business’s relationship with that supplier must be provided to the buyer. This will ensure a smooth relationship between them should the buyer decide to continue doing business with them.

8. Searches and consents

The buyer’s lawyer will typically perform a number of searches against the business to be sold or against you, the seller. This is to ensure that there are no liens registered against assets belonging to you or the business. The buyer will also need to verify that the business is up to date in its payment of taxes.

9. Non-competition

The buyer might decide to ensure that you do not, directly or indirectly, compete with the business you want to sell. This is to check sellers who might want to take certain steps after the transaction that could harm the business, such as setting up another business to compete with the sold one.

10. Other documentation

Although the purchase agreement is the main legal agreement that binds the transaction, other supporting documents will also be required. These include transfer and assignment documents, resignations, releases, statutory filings, legal opinions, and so on as may be requested for by the buyer.