Selling a business step by step
Selling a business is a complex process that requires careful preparation and clearly defined steps. To help you navigate this complex issue, we have prepared an overview of the key stages and terms you should be familiar with if you are planning to sell or buy a business. Each step is important, and omitting any of them can have serious legal, financial, and commercial consequences.
Author of the article: ARROWS (JUDr. Kateřina Müllerová, office@arws.cz, +420 245 007 740)
Asset Purchase Agreement (APA)
When a company is sold, it often involves the purchase of its assets, such as real estate, technology, licensing rights, and other tangible or intangible property. An Asset Purchase Agreement is a contract that specifies the terms and conditions of the sale of specific assets. This includes a detailed list of assets, the price, and the methods of payment. In this type of transaction, it is not necessary to transfer liabilities, which can be advantageous for the buyer if they want to limit their liability.
Business Valuation
Before selling, it is important to know the value of your business. Business valuation involves analyzing the financial situation, projected growth, asset value, and other factors that affect price. This step is crucial for determining a realistic price and negotiating with potential buyers. An inaccurate valuation can result in the company being undervalued or overvalued, which could affect the entire sale process.
Confidentiality Agreement (NDA)
Before sensitive information is shared between the seller and the buyer, it is essential to sign a non-disclosure agreement (NDA). This document protects both parties from the disclosure of confidential information during negotiations. Signing an NDA ensures that all business and financial details will be kept confidential and used only for the purposes of the transaction.
Due Diligence
Due diligence is a process of thoroughly examining the condition of a company that is up for sale. It involves an in-depth analysis of all relevant information, such as financial records, legal obligations, commercial contracts, but also any legal risks or potential legal disputes. This process protects all parties involved by revealing weaknesses that could affect the price, terms, or future operation of the company.
For sellers, due diligence is a great opportunity to show that the company is in good shape and that all aspects of it are transparent. Before the sale, you should review all aspects of your business, in particular, perform a financial analysis, review all legal obligations and contracts, regulatory compliance, and if the company has intellectual property such as patents, trademarks, or copyrights, ensure that they are properly registered and protected.
Preparing a company for due diligence is not easy, but if you are thorough, you will help ensure a smooth sale and good terms.
If you are a buyer, due diligence will provide you with key information about the company you intend to purchase. This process will help you uncover potential hidden risks that could affect your investment. If you identify any potential risks, be prepared to negotiate the price or terms of sale. This process can save you significant costs that you might otherwise incur if you fail to identify these risks.
Escrow Account
An escrow account is a means of ensuring that part of the purchase price is held in a special account until the terms of the transaction are fulfilled. This mechanism protects both the seller and the buyer from risks that may arise during the transaction, such as unexpected problems with the fulfillment of obligations. Once the terms of the transaction are fulfilled, the amount in the escrow account is released.
Final Agreement
After completing due diligence and negotiating the terms, a final agreement is concluded, which defines all aspects of the sale, including the price, payment terms, and method of transfer of assets. This agreement is binding and failure to comply with it may result in legal consequences and penalties.
Guarantees
Guarantees are common in business sale transactions and serve to protect the buyer from unexpected problems. These may include guarantees regarding the condition of the assets, the absence of legal disputes, or the fulfillment of tax obligations. Guarantees are set out in the final agreement and may also affect the price.
Heads of Terms
Heads of terms are an informal but crucial document that sets out the basic terms of the transaction, such as the price, the structure of the sale, and the main terms for negotiation. This document can help prevent misunderstandings during subsequent negotiations and can form the basis for the preparation of more detailed agreements.
Indemnity
Indemnity is an agreement that sets out one party's liability to compensate the other party for damages arising from certain conduct, such as failure to perform obligations or improperly performed due diligence. This clause often appears in the final contract and can be an important element in negotiations.
Joint Venture
In some cases, the sale of a company may lead to the creation of a joint venture between the seller and the buyer. This step is appropriate if the company is not sold in its entirety, but the seller and buyer agree to form a partnership for a specific business area.
KYC (Know Your Customer)
Before any transaction takes place, the parties to the transaction must be vetted to ensure that there are no risks associated with illegal activities. KYC (Know Your Customer) is a process that involves checking the buyer's identity and background to ensure that the transaction is conducted in accordance with the law.
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Letter of Intent (LOI)
A Letter of Intent (LOI) is a document that sets out the buyer's preliminary interest in purchasing a company. This letter does not commit to any legal action, but shows that both parties intend to enter into a transaction. An LOI typically includes the basic terms of the transaction and sets out the framework for subsequent negotiations.
M&A Agreement
An M&A Agreement is a key document that defines the terms of a merger or acquisition. This type of agreement is comprehensive and covers all aspects of the transaction, including financing, liability, warranties, and the terms of the transfer of shares or assets. Careful drafting of an M&A agreement is essential to protect the rights of all parties.
Conclusion: Every step matters
Selling a business is a process that requires careful planning and knowledge of all the key steps. If you decide to sell or buy a business, devote sufficient time and attention to each stage, from due diligence to the final agreement. A properly managed process can save you considerable costs, legal problems, and unnecessary delays. Remember that the right legal advisor is essential for a successful transaction and to minimize risks.
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