Legal positioning of the business has two broad objectives:
- To clear any legal impediments to the sale.
- To attend to the legal matters necessary to insure an ordinary sale and transition of the business.
- Clearing the Legal Obstacles:
Sellers oftentimes bring a sale to the point of near completion only to find the sale cannot go through due to legal obstacles. Therefore, an early goal of the sellers and counsel is to thoroughly review the corporate, contractual, financial and legal items that may constrain a sale and where necessary clear the impediments.
A clearance checklist includes:
a). Does the seller have the authority to sell? Where the business is owned by partners or
multiple stockholders, verify that there is agreement to sell or the selling stockholder
controls the requisite votes to authorize the sale.
b). Is the business owned by an estate? Commonly, death of the owner will prompt an
immediate sale. Ascertain that the executor agrees to the sale and the probate
requirements have been satisfied. Where the sale requires court approval, any
agreement to sell should be conditional upon court approval.
c). Is the business franchised? The franchised business cannot ordinarily be sold without
franchisor approval. The conditions of assignment and the buyer requirements must
be investigated.
d). Are there major contracts that may interfere with the sale? Where the business
depends on production or distributorship agreements or contracts with a primary
customer, the contracts should be checked to determine assignability.
e). Is a sufficient lease available? This point is repeated because so many small
businesses are placed on the market without verifying whether an acceptable lease
lease is available to the buyer. Review the terms and assignability of the present lease
or proposed terms of a new lease.
f). Is the business solvent? Unless it is clear that the anticipated purchase price can fully
satisfy creditor claims, determine the likelihood of creditors settling for partial
payment or the need for partial payment or the need for reorganization proceedings
or other debtor’s remedies to reduce debt prior to a contemplated sale.
Legal Checklist in Planning a Sale:
There are numerous legal details that precede placing a business for sale. The primary items subject to review may include:
a). Pending litigation and their impact on any proposed sale.
b). Employment contracts and whether they can be assigned or terminated without
penalty.
c). Union contracts and their assignability.
d). Employee pension plans and profit sharing and their assignability or provision for
termination.
e). Existing contracts and their assignability or rights to terminate.
f). Secured loans, conditional sales agreements and equipment leases, to determine
their current status and rights to assign or terminate.
g). Patents, trademarks and licenses, to determine whether properly filed.
h). Corporate records; to verify required filings and that corporate minute book is
current.
i). Obligations between the owners and the corporation to determine conditions of
termination.
j). Personal guarantees issued by owners of the corporation and the rights to
terminate.
For more information or a personal consultation, please feel fee to contact our office.
716-668-6868