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INFORMATION FOR BUYERS AND SELLER
A. PREPARATION IS THE KEY TO SUCCESS
1. It is important to keep your company in a ready to sell condition so that you will be able
to sell when the overall market conditions are favorable.
2. Buying a company during poor economic times often allows you to buy at a lower price.
3. Smaller companies add entrepreneurial spirit to large companies, which can be valuable to the larger company.
4. You cannot control the overall economy, but you can track it and guess for yourself what will happen next.
5. Selecting the right business broker is an important decision that should be made carefully and only with a
signed non-disclosure agreement.
6. Always choose an experienced business broker who has many business contacts.
7. Business brokers are not free, taking either a flat fee or a % of the sale price,
which can be as high as 10%, so look around before choosing one.
8. You need to carefully qualify the brokers credibility by determining his or her
business experience with businesses of your type as well as having good access to
Mergers and Acquisitions attorney’s, accountants and tax attorney’s.
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B. INITIAL WORK
1. In order to evaluate the purchase agreement that you will encounter, it is important to find
a competent and experienced M&A attorney who you trust.
2. Be prepared to take over a year for the sales agreement process, the length of which will depend
on the overall complexity of the transaction and the market conditions.
3. If you are purchasing a small company it would be wise to take the existing top management personnel
or employees to ensure a smooth transition for a period of time after the sale. If the existing personnel
have a bad work reputation, it may be wiser to look elsewhere and look for another business.
4. It is a good idea to put yourself in the buyers or sellers shoes to speed up and smooth out
any negotiations as both parties have their own agendas and interests.
5. Selling a business can take a long time but it is a good idea to break the selling process
into smaller stages. It is recommended that you split the selling process into 5 steps:
6. pre-sales stage, initial marketing, due diligence, proposal/negotiation and closing stage
and finally the post-sale stage.
7. If you decide not to use business brokers you must carry out research using media to
determine how best to sell or buy a business.
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C. LEGAL REQUIREMENTS
1. As a seller you are obliged to tell the truth about your business. It is important not to read
conjecture as facts. Always reveal facts that could change the future value of the company.
When doing so make an assessment of the positive and negative business possibilities of the facts.
2. Always inform the buyers of the facts that are really relevant to the purchase. If the information
was divulged and the buyer discounted its importance then that is the buyers fault, not the sellers.
That will reduce any legal problems.
3. If you are a buyer it is very important to carry out due diligence to verify the underlying
and often hidden aspects of the sellers company.
4. Due to the legal complexity associated with the sale/purchase of a business always use an attorney
and remember that the clearer you are on what you want out of any negotiations the better chance
you have of the attorney getting them for you.
5. The least that a buyer expects from a seller is a current complete set of corporate documents so
fulfilling the corporate obligations to the shareholders and other owners of the business.
6. At the end of the due diligence stage, you should have a detailed discussion about each parties
expectations regarding the fair and legally required treatment of employees.
Again it is best to involve an experienced attorney to guide you through the legal
requirements.
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D. LEGAL FRAMEWORK
It is very important to have all agreements in writing so that the legal agreements act as a written
clarification of understanding between parties, outlining what one side agrees to in exchange for
the other persons or group agreeing to do something in return.
Again it is best to use an attorney to negotiate and finalize written contracts, but remember to keep
the attorney’s pointing in the direction of creating a legal document that achieves your business
objectives.
I will now list a standard list of the components normally found in a Buy/Sell agreement:
- General Information- This section
outlines the companies involved and their primary business
location.
- Purchase and Sale of Assets- This section
outlines the company assets covered by the transaction.
- Purchase Price- This section is concerned
with the money involved in the transaction including any
information related to paying for the asset purchase.
- Closing- This section covers details
associated with the closing itself, such as the date and location.
- Representation and Warranties- This
section details all of the material information aspects of the
sale. In particular, the seller states in writing that information
revealed to that point is true. Due to the complexity of this
section, especially its indemnification and litigation clauses, it
is wise to seek the advice of an attorney.
- Non-competition- This section outlines
the restrictions placed on the seller with respect to setting up a
new competitive business, the enforcement off which is difficult.
- Further agreements- This section outlines
non-standard agreement requirements and can be very long depending
on the features of the contract.
- Condition Precedent to Causing- This
section outlines the various elements that the seller and buyer
have agreed to do before closing. Information about penalties and
remedies associated with not meeting these conditions and
employment agreements are included here.
- Indemnification; Survival of
Representations and Warranties- This is a very important section
if something goes wrong in the future or if something that you
alleged as true turns out not to happen.
- Post-Closing Matters- This section
outlines previously agreed actions and conditions that apply to
the seller and the buyer once the agreement is signed.
- Risk of Loss- This section outlines who
inherits the risk of loss prior to signing the agreement.
- Miscellaneous- This section includes
information that wasn’t covered in any previous section.
- Attachments- This section contains all
types of information that are needed to support the contract being
signed such as financial amd employment agreements.
- As a member on the board of a corporation you have a fiduciary, “legal and financial”, duties
to protect the financial interests of company shareholders. There is a legal foundation for
determining the proper execution of these duties called the
“Business Judgment Aide” (See Glossary).
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E. BUSINESS FRAMEWORK
1. A simple asset purchase is the least complicated of all purchase agreements. The buyer designates
the items that he or she wants to buy and the seller agrees to sell them. The seller then passes the
items along with their associated liabilities, such as outstanding loans on equipment to the buyer
who assumes their ownership.
2. When a buyer purchases a stake in a company, the buyer becomes a partial owner of that company.
This applies to any stock purchase. When the buyer purchases all of the stock in a company, he or
she becomes the new owner. At that point, all company assets pass to the new owner along with
all liabilities.
3. Transactions can be a combination of cash and stock so allowing a buyer who has insufficient ready
cash to pay the full company price. The buyer also acquires the remainder of the company in company
stocks while the seller walks away with the cash.
4. The role of the board of directors in general is to monitor the overall operation of the organization
to ensure that the shareholders asset value is invested in the best possible way.
5. The smaller the size of the company the greater the impact each employee makes on the day to day
operation of the business as a whole. A founders importance in a company is crucial although this will
always be downplayed by the owner. If you allow the founder owner to leave immediately when you purchase
the company you might end up owning a company that has just lost its most important asset. The retention
of the founder of the newly purchased company needs to be determined on a case-by-case basis.
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