I allude to the attorney’s role in the company sales process as part of the blog series, "Steps In a Business Transaction". I thought it would be helpful to outline more specifically what attorneys do to help business people buy and sell companies:
Getting Ready. Small businesses owners sometimes neglect corporate formalities such as annual meetings and resolutions. If the small business is organized as a corporation or LLC, it must make sure that its organizational documents are up-to-date. It will have to represent that they are as part of the sale. Attorneys review your organizational documents and help fill-in anything that’s missing. Reviewing the other party’s (i.e., the buyer or the seller) organizational documents is also part of the due diligence review. When representing the buyer, the attorney’s "getting ready" activities might include organizing the business entity (e.g., a new LLC or corporation) that will make the company purchase.
Contract Negotiation and Drafting. Attorneys help you structure, negotiate and document the terms of the company sale. The primary contract for a company sale typically takes the form of an Asset Purchase Agreement, a Stock Purchase Agreement, or a Merger Agreement – depending on the specific terms under which the parties have agreed to transfer the business. An intermediate step in preparing this primary agreement is preparation of a shorter term sheet or deal memo. Signing the Purchase Agreement is usually not the end of the transaction. The parties must still complete the financing arrangements, due diligence review, and the completion of any ancillary documents.
Financing. Legal help is especially crucial if the sale includes investor financing or seller financing. Financing through private investors offers tremendous structural flexibility but requires attention to and compliance with state and federal securities laws (even if your investors are your friends and family). Seller financing, through which the purchaser pays a portion of the purchase price at closing and pays the remainder over a period of years, requires a contract that adequately protects both the seller and buyer.
Due Diligence Review. The attorney’s role in this step includes reviewing relevant documents such as leases, vendor agreements, franchise agreements, employee agreements, and material contracts to be transferred. The attorneys will also work with the parties to make sure that any necessary regulatory or third party approvals are secured. The buyer’s attorney typically orders a UCC search to verify that there are no liens against the company assets. Read more about the due diligence review.
Intellectual Property Transfer. If the business includes valuable copyrights, trademarks, and other ip, an attorney makes sure the seller actually owns that ip and properly transfers it to the buyer. Sometimes a company does not own the ip it believes it owns – such as work created by freelancers with no written contract. This ip review might be part of the getting ready or due diligence review step.
Closing and Post-Closing. Attorneys make sure all the documents get signed and the money exchanges hands between buyer and selelr. If there are any ancillary documents such as a promissory note or a non-compete agreement, the parties will sign those as part of the closing. Most of the ancillary documents should have been mentioned in the term sheet or the definitive agreement. Read more about closings and see a list of potential ancillary documents.
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