Five Items to Include on a
Legal Checklist When Selling a Business

 Selling a business can be stressful. The most immediate concerns usually involve nonlegal issues, such as valuing the business, setting a price (and deciding whether it can or should be negotiated further, thereafter), finding the right buyer, evaluating whether financing is needed and, if so, whether it is available, etc. However, it is just as important to focus on how to address the legal issues, since not doing so can ultimately result in the entire deal collapsing. The following is a nonexclusive list of some (though not all) of the items that should be considered when putting together a legal checklist for selling a business.  

 1. Define what is being sold.

The seller must determine whether they are selling the shares of stock or other ownership interest in the business or transferring the assets without likewise transferring the underlying ownership interest. A variation on this would be a business owner who might exclusively or non-exclusively assign their business’ intellectual property, such that the assignee would purchase the right to sell the assignee’s product using the assignor’s trademark or other intellectual property. (There is actually a name for that: it is called a franchise.)

 2. Determine how the price will be paid.

Obviously, a seller will normally prefer to be paid cash on the barrelhead. However, many sales involve a payment plus a promise to remit the balance over time. If that is accomplished through seller financing, the first issue the seller will want to address is the prospect that they will be repaid. Therefore, it is important to obtain collateral for the loan that is both accessible to the seller in the event of default and has a value that takes into account not only what may be owed, but the additional prospective cost of enforcing the seller’s rights as a creditor. Another approach for providing the seller with an incentive to transfer the business would be to have them given a consulting agreement to continue to provide services for a period of time in return for a generous compensation package. This can also have the tax benefit of attributing the income to years other than those in which the bulk of the purchase price is being paid.

 3. Determine whether the key employees are bound by a contract that will convince them to remain in place.

Businesses are not just a conglomeration of products, marketing, financing, and a healthy dose of luck. They are also built on the ambition, character and integrity of the people who are committed to making them a success. Retaining those people can be integral to the business’ future viability once it is sold. Therefore, it is critical to raise the issue of whether the key employees are the subject of a contract that will require or at least incentivize them to stay after the sale, especially one with a legally enforceable non-compete clause a/k/a restrictive covenant.

 4. Determine whether there are legal or regulatory impediments to the sale.

The first obvious legal impediment to the sale would be if the seller unwittingly does not actually own the business; this would normally be engendered by having originally purchased it without the involvement of counsel. Under such circumstances, the attorney may need to review the underlying documentation to ensure that what is being sold is what is actually owned. There are also regulatory issues that sometimes need to be addressed, the most common of which is whether the purchaser has the proper license/permits to operate the business going forward. In other words, the purchaser should not only avoid seeking to buy what the seller does not own, but also should not be buying what the seller does own, but the buyer cannot operate.

5.  Are the liens that will be an impediment to selling the business?

One of the key preclosing procedures that normally is done prior to the sale of a business involves performing a lien search. The reason is that the seller will not want to purchase a business before knowing whether secured creditors have a claim on its assets. The search can involve analyzing such items as the filed uniform commercial code financing statements (UCC-1), as well as performing a judgment search to ascertain whether any lawsuit resulted in a recorded judgment involving the business. That is something the buyer will want to know in advance of the closing.

However, in certain circumstances, the seller may not know about a judgment against their business because they were not properly served with process in the lawsuit, and the judgment was entered by default. One reason this may have happened is that the default judgment was entered in a court outside the jurisdiction where the business is located. Arguably, placing a provision in the contract of sale (and ultimately at closing, the bill of sale) containing a representation that there are no known judgments or other liens that have failed to be disclosed can go a long way to addressing this problem.

The Nissenbaum Law Group Welcomes the Opportunity to Represent Clients Who Are Selling Their Businesses.

The Nissenbaum Law Group stands ready to assist its clients in avoiding the pitfalls they may face when selling their businesses. Please see our Selling a Business practice area page or contact us.