What is the legal process for selling a business?

We are fans of The Checklist Manifesto by Atul Gawande and checklists are huge for us at Rubicon Law! Especially in fast moving and high-stakes situations, checklists help get the right results, increase accuracy on all transaction points, and assist clients in understanding the deal process. Selling a business is one of the most complex transactions an entrepreneur will work on. To educate clients and provide more transparency, this is one of the checklists we like to share.

Preparation (Maximize Value, Start Early)

1. Engage advisors (legal, tax, & bankers), board, and officers
2. Work with advisors on deal timeline & process
3. Adopt best practices to maximize value
   1. Documented processes, & record keeping
   2. Legal, product, operational, employees, tax, regulatory, & market research
4. Review market to understand potential terms & structure
5. Set business goals for the sale
6. Market the deal
7. Appoint internal transaction team
   1. Handle diligence, manage advisers, and support transaction
   2. Consider bonus compensation for these extra efforts
8. Begin preparing Data Room (due diligence)
   1. Corporate documents
   2. Tax returns and financial statements
   3. Documentation of all loans
   4. Proper title of assets
   5. Key contracts
9. Understand fiduciary duties & minority shareholder rights (directors must act in the interest of stockholders)
10. Key integration and employment issues (employee benefits, equity incentive plans)

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Letter of Intent (Memorialize Fundamental Terms)

1. Work with advisors to ensure market terms for key points & tax efficiency
2. Create early deal momentum. This could be highest point of Seller’s leverage
3. Understand the parties & their representatives (financial or strategic buyer)
4. Transaction structure
   1. Asset Purchase (buyer can be selective in assets/liabilities acquired; buyers often prefer)
   2. Stock Purchase (sale of shares; can be better tax wise for seller if small # of shareholders)
   3. Merger (surviving entity retains all ownership and can be better tax wise for seller)
5. Consideration: cash, stock, debt, combo
6. Clarity on assets to be purchased and liabilities to be assumed
7. Confirm whether antitrust filings required
8. Key Terms
   1. Earn out
   2. Closing date & conditions
   3. Indemnification
   4. Escrow
   5. Employees being retained
   6. Confidentiality
   7. Exclusivity
   8. Expenses
   9. Binding terms
   10. Good faith negotiation

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Due Diligence (Financial, Operational, & Legal Review)

Be Due Diligence ready – increases value! 

1. Tiered sharing of sensitive information
2. Data Room (organize electronically)
   1. Organizational documents
   2. Financing documents
   3. Previous issuances of securities
   4. Key contracts
   5. Board & stockholder approvals
   6. Financial & accounting records
   7. Value of assets & proper title
   8. Federal & state tax compliance
   9. Accounts receivable and payable
   10. Inventory
   11. Liabilities & impediments to transfer of assets
   12. Employment & consulting agreements
   13. Employee benefits
   14. Licenses, permits, environmental regulations
   15. Intellectual Property Agreements for employees & consultants
3. Identify & evaluate strength of IP
   1. Patent, trademark, copyright, licenses, open source, etc.
4. Insurance policies
5. Client list
6. Sales & marketing materials
7. Collect personal email addresses for all stock and option holders
8. Existing/Anticipated litigation
9. Settlement documentation
10. Impact on purchase price from findings

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Purchase Agreement (Principal Legal Document)

1. Actually read the documents and clarify questions with advisors
2. Buyer typically prepares 1st draft
3. Asset Purchase Agreement, Stock Purchase Agreement, or Merger Agreement
4. Define everything to be purchased (assets, customer lists, IP, goodwill, stock, etc.)
5. Understand how purchase price is calculated & adjustments (involve tax/accountants)
6. Earn out (payments after closing to bridge valuation)
7. Scope, knowledge, & materiality of Reps & Warranties (if untrue, then liability)
   1. Past, present, & future statements
   2. Bring down at closing
   3. Risk shifting (MAE) & termination
   4. Market data (know which to give)
8. Covenants (promises to do or refrain from doing certain actions, e.g. operating business)
9. Indemnification (compensation for breach of Reps/Warranties/Covenants)
   1. Cap and/or basket
   2. Process for claims
10. Escrow (funds held for indemnification obligations; consider how it will be released)
11. Disclosure Schedules (critical information on seller)
    1. Information on the assets and liabilities
    2. Exceptions to Reps & Warranties
    3. Diligence concerns
12. Closing Conditions
13. Confidentiality
14. Treatment of employees & benefit plan
15. Termination rights
16. Break-up fee (compensation if no closing)
17. Jurisdiction, Venue, Governing Law
18. Dispute Resolution (litigation or arbitration)
19. Asset Schedules
    1. Inventory, Real Estate, Technology, Equipment, R&D

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Ancillary Documents (Transfer & Corporate Approval)

1. Transfer Documents
   1. Bill of Sale
   2. Assignment & Assumption
   3. Deeds
   4. Stock power
2. Board & Stockholder Consents approving deal
3. Good standing certificate
4. 3rd Party Consents
5. Financing Agreement (Principle, Term & Rate)
6. Lease
7. Transition Services Agreements (temporary support from seller on business integration)
8. Employment Agreements
9. Certificates (certifies reps & warranties, closing conditions, & authority of signers)
10. Legal Opinion (assurances of certain legal matters)
11. Confidentiality Agreements
12. Escrow Agreement (govern portion of purchase price held for indemnification)
13. Stock Certificates

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Closing (Solidify the Deal & Get Paid)

1. Ask for closing checklist early
2. Decide whether electronic or in-person
3. Are the representations and warranties made at signing and then again on the closing date (known as a bring down)?
4. Wire transfer process
5. Determine who receives consideration (e.g. a lender to clear a lien)
6. Satisfaction of closing conditions
7. Convey acquired shares & assets
8. Regulatory filings
9. Consider who should receive signed documents

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Post-Closing (On-Going Ties Between the Parties)

1. Effectively track these important obligations
2. Consider how to announce to employees, customers, & vendors
3. Pay attention to continuing reps, warranties, & financial metrics
4. Covenants
5. Check-in calendar between buyer and seller
6. Shareholder representative
7. Claims process
8. Escrow holder & yield on amount held
   1. EscrowUp to support non-profits
9. Purchase price adjustments
10. Integration (people, products, services, prices, assets, locations)

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By understanding the process, a business owner will be in a better position to respond to requests from any party more quickly and efficiently, understand their points of leverage, and move strategically towards close (remember, time kills all deals).

Interested in learning more about how to get Due Diligence ready? Check out our Due Diligence Checklist.