When you’re ready to sell your business, there are a number of legal documents that need to be drafted along the way. From initial discussions all the way to closing, these key legal documents help protect parties interests, guide negotiations and ultimately spell out the terms of the deal.
This article will give a quick overview of the preliminary legal documents you will want an experienced attorney to draft when you decide to sell your business.
When speaking with a potential buyer, the first thing you need is a confidentiality agreement or, more commonly referred to as a disclosure agreement (NDA).
The buyer, in conducting its due diligence, will want to see historical data like business financials, and commercial contracts with suppliers, vendors and customers. This historical data is not public knowledge, and you, as the seller, want to keep it that way.
Due diligence is the process by which a buyer investigates and confirms pertinent information about the seller to determine the viability of the business and evaluate risks associated with the seller and/or its business operations.
The confidentiality agreement can be one-way in that it protects only against the buyer’s disclosure of information shared by the seller, but a prudent seller will want to ensure the buyer is credible and conduct its own level of due diligence. When a seller intends to ask the buyer for confidential information in return, a two-way NDA is more appropriate.
Sharing proprietary business information without a confidentiality agreement in place allows the recipient (the buyer) to take that information and freely share it. Would you want your competitor to get a look at your financials or your customer lists?
Of course not!
Besides wanting to protect against having the buyer share your critical business information, it’s important to remember that a buyer may begin due diligence and then elect to walk away from the deal.
A confidentiality agreement that’s drafted well can continue to protect your confidential business information long after a buy decides to pull the plug while preserving your right to seek remedies in the event the buyer leaks your information either by accident or on purpose.
A term sheet outlines the preliminary terms that are then captured in a letter of intent. This type of document is not as formal as a letter of intent and typically lists the most critical terms of the deal such as the purchase amount, structure of the deal (asset vs. stock), no-shop restrictions and a reference to the NDA, etc.
The format of the term sheet is typically a grid or list dispensing with any legal language or extraneous wording. Most parties skip the term sheet and elect to enter into a letter of intent right away due to its somewhat duplicative nature.
Letter of Intent (LOI)
A letter of intent is a document that declares the preliminary intentions and commitments of the parties with respect to the intended acquisition.
It formally stipulates the major terms and conditions of the deal, which will later be incorporated into the purchase agreement. Like a term sheet, the letter of intent will include the purchase price, structure of the transaction, but in far greater detail and including additional details such a purchase price adjustments, assumption of certain liabilities, payment of fees associated with the transaction (i.e., who pays for what), and retention of key employees.
A well-drafted letter of intent will address conditions to closing and the due diligence process such as when it will commence, the time period in which is will be completed and the extent of the diligence that will be requested.
It’s important to note that, depending on how the letter of intent is drafted, it may or may not be legally binding. A well-written letter of intent will include explicit language limiting the extent to which the agreement binds the parties.
Beyond outlining the terms of the agreement and its use in crafting the final purchase agreement, the term sheet can be used by the seller in soliciting finance sources when the acquisition is not a cash purchase.
Benefits of Working with Nocturnal Legal
Nocturnal Legal ensures your preliminary legal documents are drafted properly to mitigate your legal risks, protect your confidential and proprietary business information, and lay the foundation for a fair and reasonable purchase agreement. Attorney Paloma prides herself on helping business owners navigate and successfully sell their business to large corporations where strong negotiation skills play a key role in obtaining market terms and a fair closing.