5 Legal Mistakes to Avoid When Selling a Business

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Selling businesses the right way means going through a business broker. That’s because a business broker has done this all before and can help clients avoid common legal mistakes like forgetting to sign a non-disclosure agreement or forgetting that a letter of intent is sometimes a necessary and helpful part of selling businesses. Here are five legal mistakes you need to avoid when you’re helping your clients sell their businesses.

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1. Remember the Non-disclosure Agreement

One of the most crucial ingredients for selling a business discretely is putting a non-disclosure agreement on the table for your client’s potential buyer to sign.

A non-disclosure agreement essentially says that in the event that the sale doesn’t happen, for whatever reason, the buyer who didn’t make the purchase won’t and can’t talk about the details of the deal or the company.

Many businesses don’t even want to broach the possibility of selling their business without a non-disclosure agreement. Why? Because a non-disclosure agreement prevents a buyer from sharing details about a potential seller’s (i.e., business owner’s) strategic business and financial position.

A competitor would love nothing more than having a buyer divulge the exact composition and strategic advantages of a rival business. Having the prospective buyer sign a non-disclosure agreement at the outset precludes that possibility from being realized.

2. Get the Transition Issues in Writing

Sit down with your client and the seller and determine whether s/he wants to transition in a clean-break fashion from the business or, rather, provide training, support, and/or guidance after the sale but before the buyer sets up shop. Get it all in writing and avoid confusion or legal hassles later.

3. Have the Buyer Sign a Letter of Intent

Once the buyer has agreed to go forward with the deal, make sure that as a business broker, you provide the buyer with a letter of intent to protect the rights of the seller.

A letter of intent essentially says that the prospective buyer who’s committed to the purchase will have to pay a reverse termination fee should the prospective buyer pull out of the deal prematurely.

The nice thing about a letter of intent is that it’s fair for both parties (buyer and seller) and it only kicks in if the buyer welshes on the deal for a reason that’s not the seller’s fault.

If the buyer finds out new details that violate the original contract and the seller is demonstrably at fault, then the buyer is protected and doesn’t have to pay a reverse termination fee.

If the buyer, on the other hand, simply doesn’t feel like obliging the terms of the contract, then the seller is protected. It’s fair. A letter of intent should be in the back pocket of every business broker.

4. Avoid Exaggeration When Selling Businesses

Businesses use business brokers to intermediate deals and frame their business as flatteringly as possible while remaining loyal to the facts.

Some business brokers, however, have a tendency to stretch the truth to the breaking point and essentially misrepresent businesses to potential buyers. Numbers that don’t add up or overly sanguine business forecasts could cause legal issues later with buyers.

5. Make Sure to Pre-qualify Would-be Buyers

You should be pre-qualifying your clients’ potential buyers early and often to ensure that the business seller’s rights are being protected. Allowing anyone into the inner circle of privileged financial disclosures could be disastrous for the seller.

Business brokers should ensure that only a select group of potential buyers has access to the seller’s sensitive financial and strategic planning details.

Having vetted would-be buyers sign confidentiality agreements and asking buyers to provide details about their financial readiness for the upcoming deal are appropriate steps to take to keep both sides protected and honest.

For more information about the legal mistakes that you need to avoid when brokering a business, contact Transworld Business Advisors today!

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