How Small Business Owners Should Prepare Legally Before Selling A Company

Quick Summary

Selling a small business is the biggest financial transaction most business owners will ever complete. And most of them begin the process significantly underprepared on the legal side. They find a buyer, they start talking numbers, and then they discover, during due diligence, that there are issues they didn’t know existed. Documents that don’t exist. Contracts that need consent to transfer. Ownership structure problems that require immediate cleanup.

1. Get Your Entity In Order Before Anyone Sees The Books

Start with your business entity itself. Is your LLC or corporation in good standing with the Georgia Secretary of State? Have annual reports been filed? Are all ownership interests accurately reflected in your operating agreement or corporate records?

Buyers conduct entity-level due diligence early. If your records show ownership percentages that don’t match your operating agreement, or if there are outstanding obligations to former partners or employees who received equity, those issues become negotiating points or deal stoppers. Clean this up before you’re under a letter of intent.

2. Audit Your Contracts For Assignability

Every material contract your business has, vendor agreements, customer contracts, leases, software licenses, professional service agreements, needs to be reviewed for two things: whether it can be assigned in a sale, and whether it requires third-party consent to transfer.

Many contracts have provisions that make them non-transferable without the other party’s consent. If your biggest customer relationship is governed by a contract that voids on sale of the business, that is a material issue. If your office lease requires landlord approval for assignment, you need to know that and build it into the transaction timeline. A business sale attorney should review your most significant contracts before you begin marketing the business.

3. Resolve Outstanding Disputes Or Potential Claims

This is the one sellers most frequently defer until it’s too late. If there’s a former employee threatening a claim, a vendor dispute that’s been simmering, or a customer who hasn’t paid and may contest the amount owed, all of those become the buyer’s problem if undisclosed, and your problem if disclosed and unresolved.

Buyers’ attorneys look specifically for pending or threatened litigation, regulatory issues, and employee claims. Unresolved disputes create representations and warranties liability, meaning you can be held responsible after the closing for problems that existed before it.

Cleaning up disputes before a sale at times means paying something to resolve them. That’s almost always cheaper than what those disputes cost during due diligence or in post-closing indemnification claims.

4. Review Your Key Employment Relationships

If your business has key employees, people the buyer will need to retain for the business to operate, their employment status matters. Do you have written employment agreements with key people? Do those agreements have noncompete or non-solicitation provisions that would prevent them from leaving and taking clients after the sale?

A buyer acquiring your business is frequently really acquiring your team and your customer relationships. If your key employees are at-will with no written agreements, the buyer faces a risk that those employees walk at or after closing. That risk reduces what they’ll pay or requires additional protections, like employment agreements executed at closing, frequently with retention bonuses. Think about what commitments, if any, are in writing.

5. Prepare For Representations And Warranties

In any business sale, the buyer will ask you to make representations and warranties, formal statements about the accuracy of your financial records, the condition of your contracts, the absence of pending litigation, the accuracy of your customer and revenue data.

If any of those representations are inaccurate, the buyer can come back after closing and seek indemnification. In escrow-backed deals, they can draw against the money held back at closing. The best way to prepare is to know what you can and cannot accurately represent before you’re asked. Walk through your business with your attorney and identify anything that would require a qualification or exception to a standard representation list. Better to know before the deal than during it.

The window between “thinking about selling” and “talking to buyers” is when legal preparation has the most value. By the time a letter of intent is signed, your use is limited.

MacGregor Lyon Business Attorneys advises Atlanta small business owners through every stage of a business sale, from pre-sale preparation through closing. If a sale is on your horizon, start the conversation before you start the process.

Schedule a free consultation. Call (404) 688-5964.