Selling a Business: Divestiture Transactions

Contact Neufeld Legal PC for corporate transactional and legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

Selling one's business involves the pursuit of a number of interconnected objectives, including (i) optimizing the sale price, (ii) insuring the completeness of the deal and (iii) limiting the potential for legal liability.

Optimizing the company's sale price typically involves considerable advance work, such that the value of the company is not only readily discernable, but so is its further potential that can be realized from its acquisition and augmentation. Where possible, this is an objective that needs to be actively pursued in advance of prospective suitors investigating the prospect of the business as an acquisition target.

Making sure the transaction is complete and devoid of lose ends, whether from your prior operation of the business or as part of the sales process is important not only to the acquiring party, but also the divesting party, given that as the seller, it is in your financial interest to insure that the acquiring party does not scuttle the deal or significantly devalue the business and thereby decrease the purchase price. To the extent that it is possible to insure that there are no concerns with the business and it can easily transfer to the purchasing party, you will that much better serve.

Finally, there is always the concern of post-transaction legal liability that might arise from legal issues that can be ascribed to causes that pre-date the closing of the transaction. As such, it is particularly important that these aspects be minimized to the greatest extent possible, and the business be cleaned up and completed so as to limit potential legal exposure going forward.

Legal Work involved in Selling a Business

Selling a business is a complex process that involves a significant amount of legal work to ensure the transaction is executed smoothly, legally compliant, and that the seller's interests are protected. A business lawyer plays a critical role from the initial preparations to the final closing and post-sale obligations.

A. Pre-Sale Legal Preparation and Due Diligence

• Before a business is even put on the market, the seller's lawyer works to get the business "sale-ready." This proactive approach can increase the business's value and prevent issues from derailing the deal later on.

  • Corporate Housekeeping: Ensuring all corporate documents are up to date and in order, including articles of incorporation, bylaws, corporate minute book, and annual returns.

  • Review of Key Contracts: A thorough review of all major contracts, such as commercial leases, supplier and customer agreements, franchise agreements, and employment contracts. This is to identify any potential issues, such as clauses that restrict the sale or require third-party consent.

  • Intellectual Property (IP) Review: Confirming that all trademarks, patents, copyrights, and domain names are properly registered and owned by the business. This is crucial for businesses with valuable IP.

  • Litigation and Compliance Check: Identifying and addressing any outstanding or potential legal disputes, regulatory non-compliance, or government work orders. A buyer will want a business free of legal headaches.

  • Employee Issues: Reviewing employee agreements, pension plans, and benefits. The lawyer will advise on how to handle employees, severance obligations, and non-competition or non-solicitation agreements.

B. Confidentiality and Negotiation

• Once a potential buyer is identified, legal work shifts to protecting the seller's confidential information and formalizing the terms of the transaction.

  • Non-Disclosure Agreement (NDA): Drafting and negotiating a comprehensive NDA that prevents the potential buyer from disclosing confidential business information, especially if the buyer is a competitor. This protects the seller during the due diligence process [more about Non-Disclosure Agreements].

  • Letter of Intent (LOI) or Term Sheet: Drafting and negotiating the LOI, which is a non-binding document that outlines the key commercial terms of the deal. While non-binding, it often includes legally binding clauses, such as an exclusivity period that prevents the seller from negotiating with other buyers [more about Letters of Intent].

C. Legal Due Diligence (by the Buyer)

• This is a critical phase where the buyer's lawyers and other advisors scrutinize every aspect of the business (e.g., legal due diligence, financial due diligence, operational due diligence, commercial due diligence). The seller's lawyer’s role is to manage this process, respond to inquiries, and provide the necessary documentation from the seller's perspective.

  • Data Room Management: The seller's lawyer will help organize and populate a virtual data room with all relevant legal, financial, and operational documents. This provides a single, secure location for the buyer to conduct their review.

  • Responding to Inquiries: The seller's lawyer fields and responds to the buyer's due diligence questions, ensuring that sensitive information is shared appropriately and that the seller’s interests are protected.

  • Identifying and Mitigating Risks: If the buyer uncovers any issues (e.g., an expired license or a liability), the seller's lawyer will work to resolve the issue or negotiate a solution, such as a price reduction or an indemnity clause.

D. Drafting and Negotiating the Purchase Agreement

This is the most crucial legal document in the transaction. The purchase agreement sets out the final, legally binding terms of the sale.

• Choice of Structure: Advising on and formalizing the deal structure, whether it's an asset purchase or a stock purchase, based on the client's goals and tax implications.

• Negotiating Terms: The lawyer negotiates on behalf of the seller, focusing on key provisions such as:

  • Purchase Price and Payment Terms: How the price is paid (e.g., lump sum, installments, holdbacks, or earn-outs).

  • Representations and Warranties: Negotiating the scope of the seller’s promises about the business's condition, finances, and legal standing. This is a major source of post-closing liability for the seller.

  • Indemnification: Defining the seller's liability for breaches of representations and warranties. The lawyer will seek to cap the amount and limit the duration of this liability.

  • Covenants: Clauses that dictate what the seller can and cannot do before and after closing (e.g., non-competition and non-solicitation clauses).

  • Conditions to Closing: Specifying the conditions that must be met by both parties before the deal can close.

E. Closing the Transaction

The lawyer manages the closing process to ensure all documents are executed correctly and all conditions are satisfied.

• Closing Agenda: Creating a detailed checklist of all the actions and documents required for closing.

• Document Preparation: Drafting and finalizing all closing documents, including the bill of sale (for an asset sale), share certificates (for a stock sale), officer's certificates, and resignations.

• Fund Transfer: Coordinating with banks and other financial institutions to ensure the purchase funds are transferred correctly and securely.

• Post-Closing Adjustments: Ensuring that any final adjustments to the purchase price (e.g., for working capital) are calculated and paid as per the agreement.

F. Post-Closing Obligations

The lawyer's work does not always end at closing. They may be involved in post-closing matters to ensure a smooth transition.

• Dealing with Holdbacks or Earn-outs: Managing funds held in escrow and assisting with the calculation and release of payments tied to post-closing performance [more on issues with holdbacks and earn-outs].

• Resolving Disputes: Addressing any disputes that may arise, especially concerning breaches of representations or warranties.

When it comes to the legal component of corporate mergers & acquisitions, that is when the law firm of Neufeld Legal P.C. comes into play. Such that when your company is seeking knowledgeable and experienced legal representation in orchestrating and completing business mergers, acquisitions and divestitures, contact us at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.