You’ve worked hard to create a successful business, but now you’ve decided to move on. What are the legal implications of selling your business? And do you need a lawyer to help? According to Don Kochersberger of Streubel Kochersberger Mortimer in Albuquerque, New Mexico, the implications of selling your business are dependent on the type of sale involved.
Asset Purchase vs. Stock Purchase
Before you sell your company, you will need to determine the type of sale you want to enter into. Are you planning to sell only the assets associated with your business? Or are you selling ownership (stock) in the business? According to Kochersberger, there will be different tax consequences depending on the type of sale you choose, so be sure to speak with a tax professional before entering into a deal.
The simplest way to sell a business is to sell only your assets, and asset purchases are usually preferred by buyers as well, says Kochersberger. In an asset purchase, the buyer acquires all of the company’s assets without assuming any of the company’s liabilities. In some cases, the buyer may actually pick and choose which assets to purchase. Likewise, the seller may choose which assets to sell and which to keep.
In a stock purchase, the buyer is actually assuming ownership of the business from the seller. This means that the buyer is not only acquiring the company’s assets, but also the company’s liabilities. When a buyer accepts liabilities, however, he will normally look for, in a purchase agreement, representations from the seller limiting his responsibility. The purchase price may also be adjusted if the buyer agrees to assume the seller’s liabilities.
The Purchase Agreement
Just as a sales contract is needed to outline the details of a home sale, the details of your business sale will also be outlined in a purchase agreement. Purchase agreements for companies, says Kochersberger, are not simple agreements. “And they shouldn’t be,” he adds. You will want to work closely with a business attorney to help you iron out the details and get everything in writing. Normally, the purchase agreement will be drafted initially by the buyer’s attorney. But you and your attorney will want to draft those sections that are most important to you - usually the sections related to representations and warranties about the business.
You will want to limit the extent to which you may be held legally accountable for things that happen after the sale, says Kochersberger. In negotiating the terms of the sale, you and the buyer will decide which of the company’s liabilities the buyer will be assuming and which will remain with you. For example, you may still be liable for any defects found in products that were sold while you owned the business.
If there are significant unknown liabilities associated with your business, the buyer may want to include indemnity provisions in the purchase agreement that require you to reimburse him for certain types of expenses if they occur in the future. For example, the buyer may wish to be reimbursed for any legal fees or damages that occur as the result of any future lawsuit against the company. If you do agree to any indemnifications, says Kochersberger, you will want to be sure to include a time limit and a dollar limit on your obligation.
What about intellectual property? When you sell your business, are you relinquishing your rights to the idea that made you start it in the first place? “Not necessarily,” says Kochersberger. The ownership of intellectual property is also something that should be included in your purchase agreement. Sometimes when a business is sold, the seller will sign a non-compete agreement that prevents him from using the knowledge gained through his ownership of the original company to create a second, competing company. This helps to ensure that the individual purchasing the company has a good chance at retaining the company’s customers and that the business can be operated without interference from the previous owner, at least for a period of time.
This article is for informational purposes only. You should not rely on this article as a legal opinion on any specific facts or circumstances, and you should not act upon this information without seeking professional counsel. Publication of this article and your receipt of this article does not create an attorney-client relationship.
