Our attorneys have guided many clients through the purchase and sale of businesses.  Sometimes the transaction occurs due to the sale of the business or its assets from one owner to another.  More often, we have helped our clients buy or sell existing businesses or the assets of those businesses.

There may be business deals that can be safely written up on a restaurant place-mat, but the sale of a business is not one of them.  The "keep-it-simple" principle has its limits.  To protect your legal and financial interests, you need to put together a detailed sales contract for you and the buyer to sign.  Here are some items to consider for inclusion in the sale contract.  An overview of the acquisition process reveals the many issues that will arise.

Starting the Process:  The sales process begins either when a company makes a conscious decision to explore the market or when it receives an unsolicited expression of interest from a third party.  Shareholder value is maximized when a company is well-positioned for sale, and its financial legal and accounting functions are in good order and easily understood by third parties.  This can be best achieved by dealing with issues in advance of the sales process so problems don't arise either before or during the sale process.

Due Diligence:  Due diligence is a comprehensive strategic, financial and legal investigation of the selling company by the buyer and its advisors.  Prior to discussing transaction specifics, some preliminary due diligence will probably be done by the buyer.  Most of this will be strategic and/or financial due diligence.  If the buyer is a strategic buyer, it may focus on what strategic value the selling company will provide to it (for example, elimination of a competitor).  If the buyer is a financial buyer, it may focus on the selling company's financial condition and operating history so as to satisfy itself that it will receive a reasonable rate of return on its investment.

Before a prospective seller discusses a possible deal or provides any information, it should make sure that its counsel drafts a Confidentiality/Non-Disclosure Agreement and that such agreement is signed by the prospective buyer.  It should provide that the information that is provided will be treated confidentially and that the existence of the discussions will also be kept quiet.

Form of Transaction:  Once some preliminary due diligence has been conducted and it appears that a transaction is advisable, the parties must agree upon the legal structure of the transaction.  There are three different ways which a prospective buyer can purchase a business:

Asset Sale - The selling company sells its assets to the buyer.  Depending on the deal, the selling company's liabilities may or may not be assumed by the buyer.  After the sale, if all or substantially all of the assets of the selling company have been sold, the selling company is liquidated and the proceeds are distributed to its shareholders.

Stock Sale - The shareholders of the selling company sell their stock to the buyer.  The buyer "steps into the shoes" of the shareholders of the selling company.

Reorganization - The most common form of reorganization transaction is a merger.  Instead of cash and/or a note, the shareholders of the selling company generally receive stock in the buyer.  If properly structured, a reorganization is tax-free, but the selling shareholders must be satisfied in holding the buyer's securities as payment of the purchase price.

Each of these forms of transaction has different strategic, legal and tax implications.  For example, generally a buyer will prefer an asset sale, which provides the buyer with tax advantages and allows the buyer to decide what liabilities are assumed.  From the seller's perspective, however, an asset sale has the highest tax cost, particularly if the seller is a corporation which has not made a Subchapter S election.  Often the interests of the buyer and seller are divergent in structuring the form of the transaction, and it is important for both parties to get good legal and tax advice before making a commitment to the form of transaction.

Letter of Intent: Early on after a determination has been made that a transaction is advisable, consideration will probably be given to whether or not a letter of intent should be signed.  Letters of intent can either be binding or nonbinding.  While it may be the intention of the parties to replace it with a more formal and comprehensive purchase and sale document, a binding letter of intent is an enforceable contract.  A non-binding letter of intent, as  to its non-binding provisions, requires the prospective seller to proceed with the prospective buyer on a good faith basis.  Almost always, non-binding letters of intent contain some provisions that are binding, such as confidentiality provisions and a "no-shopping" provision that is usually requested by the prospective buyer (i.e., a provision which provides that the prospective seller will not have discussions about a transaction with any third party).  It is important for a selling company to involve its professional advisors before anything is signed, since often letters of intent contain deal terms that cannot be modified later, even if the letter of intent is non-binding.

Additional Due Diligence:  The buyer and its professional advisors will probably conduct additional due diligence after a letter of intent is signed or, in situations where a letter of intent is not used, after the parties have determined to proceed further after initial discussions have taken place.   Here the due diligence will also deal with a myriad of legal issues.   Some of these include determining that the selling company has no off balance sheet liabilities, that the buyer will have the benefit of the contracts and agreements to which the selling company is a party, and that the selling company is the owner of all of the tangible and intangible property used in connection with its business.

Preparation of the Definitive Agreement:  A definitive purchase agreement will be prepared.  Usually this is prepared by the buyer's lawyer and the selling company's lawyer will make suggested changes.  Usually there are many items that are negotiated, such as the following:

• Purchase Price Terms - The purchase price and the payment terms need to be agreed to by the parties.  With respect to the amount of the purchase price, the seller should obtain professional assistance in determining the purchase price in most cases.  "Rule of thumb" formulas for determining the purchase price should be avoided in all but the most obvious situations.  With respect to the payment terms, the buyer will try to defer a portion of the purchase price, and will want to offset from the deferred portion of the payment any claims that might arise after the closing under the contract's indemnification provisions.  To the extent that a portion of the purchase price is deferred, the seller should consider asking for provisions respecting security and guaranty of payment.
• Representations and Warranties - The purchase agreement will contain representations and warranties about the seller's business.  Sometimes these are extensive and cover many issues and concepts.  Sometimes they are more limited and the sale is made on an AS IS basis or on a modified AS IS basis.  The seller's lawyer will prepare schedules which are exceptions to the representations and warranties, and will also try to limit the scope of the representations and warranties.  These provisions of the agreement are crucial, since it is usually provided that if the representations and warranties are untrue, that the buyer is entitled to indemnification from the seller for any resulting losses sustained by the buyer.
• Pre-Closing Covenants and Conditions - The agreement will contain certain obligations of the parties to be observed prior to the closing, and certain matters which must occur prior to the closing (conditions).  Some of these provisions will be typical (such as agreements requiring the seller to conduct business in the ordinary course and providing the buyer and its representatives with due diligence access); and some of these provisions will be unique (such as conditions requiring the approval of third parties who are parties to contracts with the seller, governmental approvals or the entering into of required agreements).  An important consideration is whether the buyer will ask for a financing condition (i.e., that its obligation to close is conditioned upon its obtaining financing).
• Post-Closing Covenants - The contract will contain certain obligations of the parties to be observed following the closing.  These often include indemnification provisions, consulting arrangements, and non-competition provisions.  Generally speaking, the definitive agreement is highly negotiable, assuming the bargaining power of the parties is roughly equal.  For example, as noted above, often the representations and warranties can be limited or otherwise "watered-down."  Likewise, a seller's obligation to indemnify the buyer from losses (such as a loss occasioned by a breach of the representations and warranties) can be limited.
• Closing - When the definitive agreement has been agreed to, and all of the conditions have been satisfied or waived, the closing occurs.  Sometimes, the definitive agreement is signed at the same time as the closing, and sometimes the definitive agreement is signed first, followed by the closing after all of the closing conditions have been satisfied or waived.