Putting Up a Business for Sale Requires Paperwork

The Selling Memorandum

Before you start looking for a buyer for your business, you should have prepared your selling memorandum.

A selling memorandum is a document that tells your potential buyers everything they need to know about your company. It needs to be factually accurate, but at the same time it’s a tool to market your company, so you’re entitled to focus on the company’s successes. In your selling memorandum you can include information about your company’s history, your own background, the various products or services the company offers, the market conditions in which you operate etc. Feel free to put in any relevant information that makes your company look good. The selling memorandum should be professional-sounding yet easy to read, with as little jargon as possible.

Apart from telling potential buyers about the company, the selling memorandum can also be used to make a case for why your company is a good buy and why you have an edge over competitors.

The selling memorandum will help genuine buyers identify whether or not your company is the right one for them. Sometimes, although the nature of the company matches what the buyer is looking for, its size might make them decide not to buy. Also included in the selling memorandum should be information about your decision to sell. Every potential buyer is going to ask you why you want to sell, so this is a question you should be well prepared to answer.

If there are problems with your company, then the buyer is entitled to know about them. Later both you and your buyer will be given access to detailed financial information about each other, so there’s no point in trying to cover up difficulties that your company is having. If you’re worried that disclosing negative information about your company will affect your chances of making a sale, then also make mention of :

a) measures you have taken to overcome the difficulties
b) market trends that indicate that the situation will improve

No buyer expects to be sold a business free of problems, so disclosing this kind of information is not likely to jeopardize the sale.

The Contract

Once you decide to put your business for sale, finding the right buyer can make a world of difference in making the sale go smoothly. There are plenty of people out there who start scouting before actually deciding that they want to buy a business. But if you’re a genuine seller, you want to find a buyer who has already decided to buy business and is looking only to find the right business for sale, and the right business seller to approach. Dealing with a person who is genuinely interested will save you time, and ensure that the terms on which you sell are reasonable. To safeguard your interests, get as much of the process down on paper as possible. A genuinely interested buyer will have no problem with committing the deal to paper one step at a time, so this also helps in weeding out people who might back out after you devote a considerable amount of time to introductory meetings and negotiations.

Since a contract is a legal document, you and your buyer should seek legal expertise in writing one. But that is only after you have a series of meetings where you decide what should go into the contract. There is no need to bring in a lawyer on the first few meetings, which should be spent getting to know what the buyer is looking for, and how much space there is for negotiation. Once you and the buyer are clear on where each stands, you can start discussing whom to use to write the contract and handle the legal aspects of the deal. Your involvement with the legalities shouldn’t end once the lawyer begins the process of committing the deal to paper. Both you and the buyer should remain in touch with each other and with the lawyer.

As someone trying to sell a business, you should keep a few things in mind, so that what goes into the contract is what you discussed with the buyer.

1. The Right Buyer
If you’ve managed to find the right buyer, then writing the contract is only a process of writing out what has already been decided. Negotiating terms is something that should be finished by the time you start writing the contract. If the buyer starts wrangling during the process of writing the contract, be firm and say you’d be open to discussing the terms of the deal further, but that you’d prefer to finish the negotiations completely before starting to write the contract.

2. Simplify, Simplify
A big problem with contracts is that lawyers can sometimes tend to make them unnecessarily longwinded, in an effort to show off years of legal education. But, as with all writing, legal writing is most effective when it’s simple and to the point. As a layman, you can ensure that the main points of the deal are not obscured in layers of legal jargon. Naturally, this is not something the buyer should have a problem with. Make sure that the lawyer uses short, crisp sentences. Understanding the contract also becomes easier if it is structured properly, using numbered paragraphs that deal with one aspect of the deal at a time.

3. Spell It Out
Nitpicking the deal is your job, not the lawyer’s. So insist that even the smallest details of the deal go into the contract. Be polite when you do this, so that the buyer doesn’t get the impression that you don’t trust her. You can explain that you only want to see to it that both parties are sure of what to expect from the deal. It’s in the buyer’s interest as well, so if the preliminary meetings have gone well, you should have no trouble insisting on getting everything in writing. Alternatively, if you don’t want to be that frank with the buyer, you can say that you need all the details in paper for your business records.

4. Write It Out
It is not enough to make sure that both parties are clear on every detail of the deal, the details also have to be written into the contract. You may trust your buyer enough to shake hands and close the deal. That’s great, but put it down in writing. This is essential, even if the buyer is a sibling. You may make some changes in the deal after writing out the contract. These can be incorporated by having the lawyer make an amendment to the contract, or even just by handwriting the changes on the document and having both parties initial them.

5. Naming Names
In order for the contract to be valid, all the names used, whether of individuals or corporate entities, have to be accurate and spelt correctly. The exact terms of the deal will determine what names should be used in the contract. Most often, the agreement will be between two companies, and not between you and the buyer as individuals. Getting the names right also makes it clear who is responsible for what aspects of the deal. In case the deal doesn’t work out, the contract will clearly state who has what legal obligations.

6. Payment
The contract should include all the details of the financial part of the deal, including how much has to be paid by whom, how and when it has to be paid etc. Money is the one factor that can cause two otherwise amicable people to get aggressive, so it’s wise to step carefully and anticipate any problems as early on as possible. Often, the payment will be made in installments, so specify exactly how many installments and when each one is due. Even specify the time of day you expect the payment to be made, if you want to be extra-cautious. Your buyer may prefer to pay in cash whereas you’d rather have a business check. Discuss it, arrive at a suitable compromise and put it down in writing.

7. Contract Termination
Ominous though it sounds, you have to allow for the fact that the deal may fall through after you sign the contract. There are likely to be a number of legal and financial obligations that both parties will have to meet after signing the deal. In the event that your buyer doesn’t meet deadlines, or fails to adhere to some other conditions of the contract, you should be able to terminate the contract without getting into legal trouble for doing so. And of course if you fail to hold up your end of the deal, your buyer should be able to get out of it as well. The way to do this is to figure out the terms on which each of you should be able to terminate the deal, and include that as a separate clause in the contract. Make sure that the conditions under which the contract can be terminated don’t make it too easy for either party to do so. The reasons for termination should be fairly serious, such as repeatedly failing to make payments on time.

8. Resolving Disputes
Another precautionary measure you will want to take. Decide where you will go to resolve any disputes that might arise. Going to court is always an expensive proposition, and is something most people who run small businesses will do anything to avoid. Settling disputes through arbitration or mediation will also save both parties a lot of time. Your buyer may have the resources to drag you through a court case, so make sure you protect your interests by insisting on a legal recourse that is suitable to you.

9. Choose a Jurisdiction
It’s may happen that you and your buyer are from different states, and that the laws governing the sale of businesses differ in the two states. You will have to pick one state whose laws will govern the sale. Things will get very messy if a dispute later revolves around which state laws should apply to the sale. The very avoidable prospect of a court case aside, also decide where you will go for arbitration and mediation in case those are the legal options are chosen. Specify as precisely as possible which third party will be called in to arbitrate or mediate a dispute, so that the question doesn’t later arise of whom to bring in.

10. Confidentiality
A confidentiality agreement should only be used to protect sensitive financial information, and not as a cover up for misconduct. In a business deal, you will often learn intimate financial details about another party. Similarly, a lot of your financial life will be revealed. It is in both your interests that you include a confidentiality clause in the contract, so that your business secrets stay between the two of you, even if the deal doesn’t go through.

Contracts- Keep Them Simple and Make Them Work

A contract doesn’t always have to be a written document. You can have an oral agreement with a caterer to deliver fifty lasagnas to your house and agree to pay $10 per lasagna, and that too can be considered a contract. However, when you’re talking about a business for sale, get as much in writing as possible. This is because the process is likely to be more complicated than ordering and paying for fifty lasagnas. There is more space for misinterpretation and dispute; hence it’s necessary to be as specific as you can. But technically, all that is required for a contract to be binding is that both parties have to be in agreement, and things of value (e.g. cash, goods, services) have to be exchanged between the two parties.

Oral contracts are hard to prove in court, but they are legally binding. You may be able to wriggle out of an oral contract, but it’s a very unwise thing to do. Once you have an agreement, stick to it. When you’re putting up a business for sale, an oral agreement with a potential buyer is often a good way to get things off the ground. This will probably consist of the seller making you an offer. If you respond and accept the seller’s offer, the contract is in place and you are bound to buy from her, at the price she offered. But most likely you will respond with a counteroffer, thus restoring the responsibility of taking the process forward to the seller.

There are a few key things to keep in mind while negotiating, so that you don’t find that you have entered into a contractual agreement that you didn’t want.

1. Agreeing To Agree
A contract exists as soon as an agreement is reached. The seller will lay down her terms for the sale, thus leaving it up to the buyer to accept or reject the offer. During the period that the buyer is undecided about the offer, it remains open. If the buyer responds with an enquiry or a counteroffer, essentially a modification on the terms proposed by the seller, there is still no contract.

2. The Counteroffer
Once the seller makes an offer to you, you may make a counteroffer so that it is then up to the seller to take the process forward. In the counteroffer, you can ask for a lower price, more assets, a change in the obligations of the sale etc. It’s a politer version of haggling, but with one difference- if the seller accepts your counteroffer then you are obligated to buy.

3. Expiration of the Offer
Once the seller makes an offer, you are bound to consider it and respond to it. You are entitled to think about it for some time, but to avoid confusion, you should clarify with the seller how long his offer is open. If you want the offer to remain open for a considerably long period of time, say a month or more, then the seller may ask you to pay for the option. During that time the seller cannot make an offer to anyone else. If the expiration of the offer is not discussed once the offer is made, the offer is assumed to remain open for a reasonable amount of time. As a buyer, the best thing to do would be to accept the offer as soon as possible to avoid any confusion about how long it remains open. But without an explicit discussion of expiration, the offer itself does not constitute an obligation to sell to you.

4. Amending and Revoking an Offer
If the seller makes you an offer and you don’t accept immediately but take some time to think about it, the offer remains open. During this period the seller is entitled to amend or revoke the offer. Once you agree to the conditions of the seller, the contract is in place and the seller may not amend or revoke the offer. Further, the seller cannot amend or revoke the offer if you agree on a specific time period in which you will consider the terms of the offer.

The best way to avoid disputes later is to put everything down in writing, and not rely on oral agreements. The process of making an offer and responding with a counteroffer is a good way for a buyer and a seller to get to know each other, and be sure that they are both serious about the business for sale, before proceeding to the negotiating table and signing anything.