Selling your business is a big deal. There are so many things you have to do to prepare it for a transfer that it can easily become overwhelming. Beyond simply finding a buyer and making a transaction, there are several contracts and agreements that need to be drawn up. Additionally, you must determine the type of sale, what will be included in the sale, and what your role will be once the sale has taken place. To help gain a better understanding of the legalities of selling a business, I sat down with Mital Patel, founder and managing partner of TriAmicus Law, PLLC. As with all entries in this series, I really encourage you to listen to the podcast to get the full extent of our discussion.
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Ms. Mital Patel is licensed to practice law in Tennessee (where her practice, TriAmicus is located) and Mississippi. A lifelong entrepreneur, Mital founded TriAmicus in January of 2020. As a young girl, her family moved to England where her father opened a corner shop. Her memories from that time involve playing in the backroom, watching her father work. When they moved to the U.S., Mital’s family opened a motel in Mississippi. Because the motel had an owner’s suite, their lives were, again, fully immersed in the business. So, Mital is very familiar with the unique challenges business owners face.
Growing up in an entrepreneurial family, and becoming a business owner herself, has given Mital great insight into the needs of business owners. More than this, it has instilled a passion for business ownership. In addition to her practice, Mital owns several businesses, across 4 states, in the hospitality industry. This is why she specializes in business law. Mital is passionate about helping small business owners navigate the legalities of selling a business.
One of the very first legal documents you’ll need is a purchase agreement. This document exists to clearly define the “who, what, when, and how” of your business sale transaction. The purchase agreement is meant to outline the legalities of selling a business, detailing how your business will transition ownership. But what should you include in a purchase agreement?
Each purchase agreement should include provisions for due diligence, clawbacks, earn-outs, retention bonuses, etc. Many business owners push back on some of these provisions because they feel they aren’t needed. This is often due to their having a level of trust for the buyer and vice versa. However, you should always include language that outlines what should happen in a “worst-case scenario.” Like myself, Mital hopes you will never need these provisions but understands that they offer a valuable safety net when you do.
Although these are standard provisions for many purchase agreements, they’re not a “one size fits all” deal. Your business is unique. Therefore, the language used in each of these provisions should reflect that. So, when do you need a purchase agreement? This can vary depending on the type of sale taking place. For example, I have a business-owning client who is selling their business to a partner. In this case, draft your purchase agreement as soon as the terms are settled. In more traditional sales, you begin with receiving a letter of intent from the buyer. From there, you move into the due diligence period. During that time, you should be drafting a purchase agreement.
We’ve already determined when and why a purchase agreement is necessary. The legalities of selling a business exist to protect the interests of both parties (buyer and seller). Agreements involve compromise. But what about a partnership or buy/sell agreement? I’ve heard it said that the only ships that don’t float are partnerships. Both parties have the best intentions when entering into a partnership, but life happens. Therefore, you should create an agreement that addresses the “five Ds:”
Nobody wants to talk about these things because they’re negative and uncomfortable subjects. However, it’s imperative that you enter into your business partnership with total confidence that you’ve prepared for everything. Part of that preparation means having all of the proper documents when meeting with your attorney. However, this isn’t a cookie-cutter set of documents. Mital stated that she understands the DIY nature of business owners, but suggests speaking with your attorney before preparing certain documents. The reason for this is simple. A generic “fill and sign” document downloaded from the internet won’t include all the information and language necessary for your business. You can have beautiful legal documents that have little substance. So, speak with your attorney to find out what needs to be in your corporate start-up documents and your operating agreements.
Because of COVID, there is more cash in the market than at any time in recent history. This is causing the multiples to skyrocket during business valuations. As a result, business owners are receiving unbelievable offers. That’s really exciting, but should you be concerned when receiving such an incredible offer? According to Mital, you should surround yourself with a team of advisors who can protect you while helping you to achieve growth. This is no different than when you’re selling your business.
If you’re selling your company, remain in the driver’s seat. Now that you know you’re in that seat, who do you want to be in the vehicle with you? You’ll need an attorney to put pen to the paper. Likewise, you need to have an accountant. They will help with the financial aspect of selling your business. Your accountant can help mitigate your tax liability through capital gains. You’ll need a financial planner to help direct your money toward your financial goals. Finally, you may want to bring on a business broker to appraise your business and help facilitate a sale. This team has the expertise and experience to help you avoid some of the pitfalls of selling a business.
Selling your business is likely the biggest sale you’ll ever make. Whether you decide to take the DIY approach or hire a business broker, you need to have a good attorney to walk you through the legalities of selling a business. If you’d like to connect with Mital, she can be reached LinkedIn, or at her office, TriAmicus Law, PLLC. Once again, I strongly urge you to listen to the full interview. As always, I’ve included the link to the podcast right here in the blog.
I know life is hard. But I’ve got to tell you, life is good. Dealing with the legalities of selling a business can be frustrating, but it doesn’t have to be. With a little of that entrepreneurial fire and a great attorney, you can make selling your business, at least, financially simple. Let’s go out and make it a great day!
Are you interested in learning more about what it takes to sell your business? Reach out to us. The Financially Simple team works with business owners just like you, every day.