Key Considerations in Selling a Business

December 2, 2015

The decision to sell a business is often a monumental decision with multiple factors that need to be considered. This article addresses some of those issues from the seller’s perspective.

As part of selling the business, the buyer will require that you share extensive confidential and proprietary information about the business as part of the due diligence process. Since the very nature of due diligence is that it provides the buyer with the opportunity to evaluate the business and to determine whether it meets their expectations, there is a distinct possibility that the buyer may elect not to proceed with the purchase after having gained access to this information. It is, therefore, imperative that the prospective purchaser execute a nondisclosure agreement prior to the receipt of any confidential information requiring that any information received be held in confidence for a specified period of time. Without this requirement, if the transaction does terminate, the purchaser could potentially use this information to their advantage by, for instance, attempting to hire away key employees.

As a corollary to the preceding paragraph, the purchaser will almost certainly require that the financial records, material contracts, employee benefit plans, corporate governance records, tax information and multiple other company records be disclosed, and it will behoove the seller to make sure that these items are well organized and in a format that is easy to provide in advance of entering into the purchase agreement. Moreover, the period following acceptance will necessarily require additional time from the seller as they work to meet the buyer’s requests, and therefore any responsibilities that can be dealt with in advance will alleviate stress during the transition.

In many instances, the expertise and customer contacts of the seller are pivotal to the success of the business, and the buyer will, therefore, require the execution of a noncompetition agreement that will take effect upon the closing of the sale. The purpose of a noncompetition agreement is to prevent the seller from competing with the buyer within a specified expertise and geographical area and for a specified amount of time. In almost all states, including Wisconsin, a noncompetition agreement signed in connection with the sale of a business will be enforceable. Therefore, when contemplating the sale of the business, you will need to be ready to exit an occupation from which you may have derived significant enjoyment and meaning during the course of your career.

Additionally, many purchase agreements require that a portion of the purchase price be held in an escrow account for a specified period of time following the closing in order to deal with unknown liabilities, and to provide the buyer with some protection in the event that representation and warranties made in connection with the sale are false. For instance, the buyer will not want to assert and collect on a claim against a retired seller living in Arizona, and will, therefore, want a source of readily-available funds in case an issue arises. It is not unusual for this escrowed amount to constitute 10 to 20 percent of the purchase price, and the seller should be prepared for this portion of the purchase price to be tied up for a period of time.

Finally, in transitioning the business, the seller will want to make sure liabilities are properly allocated among the parties and that the purchase agreement includes an indemnification provision for liabilities which arise after the closing date. Generally, the buyer will ask and the seller should be prepared to provide an indemnification for the claims which arise before closing, and, therefore, when transitioning the business it may be important to leave the entity structure in place and to obtain proper tail insurance should a claim arise. The preceding points make it clear that it is important to assemble the right team to help with the sale of the business in order to ensure that the transaction is seamless and significant issues are not overlooked.