There often comes a time during the lifespan of a business where the owner has decided to pass it off to another. Maybe the stress of running a business is too great, maybe they’ve accomplished everything they hoped to accomplish and are ready to move on to another phase in their career, maybe things just aren’t going well and they’ve decided to cut bait. Whatever the case may be, there are many legal considerations that must be addressed when selling your business.
With the right degree of care and due diligence, the sale of a business should normally go off without too many hitches. But if you jump into the process thoughtlessly and unprepared, you can encounter unexpected roadblocks. Our partner Paul Skeith takes a look at these obstacles below.
Documents in Disorder
In any given year, I’m probably assisting with five or six business sales for clients. Whenever I do, I notice there are a couple commonalities that often come up which cause issues with the sale that really wouldn’t be a problem with the proper planning and care. The first common problem – and this is surprising, but true – is just making sure that the legal documents are all current and actually say who owns the business.
Over the years, clients sometimes buy out partners or have new partners join the business and their legal documents didn’t keep up with these changes! One roadblock that will definitely slow a transaction down, and maybe even stop it, is if the ownership documents don’t say who actually owns it. That’s something you’ll need to take care of before you start the sale process.
Is Your Content Really Yours?
The second issue that can really cause a problem when selling your business is if you used independent contractors in the past to create key creative content. For example, what if your logo, your branding and designs for company materials, your key software (if you’re an intellectual property based business), or other essential components of your company’s persona were created by a third party?
The issue is this: independent contractors must sign work-for-hire agreements and assignments to create these materials for a business owner. If they don’t, then they own the material that they created for you, and you do not. When a buyer comes looking and wants to make sure that you own what you say you own, they’ll want to know why you don’t have documents proving your ownership of your brand and designs. And trying to find those independent contractors that helped you 5-10-20 years ago to fix this problem can be very challenging.
A Laissez-Faire Approach to Your Lease
Another issue that often comes up has to do with your lease. Leases, whether they be for an office, a factory, or a warehouse, often contain language that says you can’t assign the lease to someone else. Sometimes, however, prospective business owners don’t believe that applies to a different company buying their company. Unfortunately, it does.
Taking a close look at your lease early in the process, and noting the terms that the landlord has specifically agreed to, is very important. Ideally, you’ll want to negotiate with your landlord a few years before it’s time to sell your business and request that language be entered in the lease that it’s not considered an assignment of the lease if the assignment goes along with the sale of your business.
Not Seeing Eye-to-Eye on Non-Competes
A fourth issue, which can be a little bit touchy, is whether your key employees have non-compete clauses. You may not personally believe in non-complete clauses and have no problem allowing your employees to work anywhere they wish, should they leave your company. That’s completely understandable.
The question every business owner who is preparing to sell must ask themselves is: What is the new buyer’s opinion on non-competes? If a new buyer comes in and insists on having non-competes for every employee, and there are none in place, it can be a very difficult process to get all your people on board with signing one, especially when you’re trying to keep quiet about the potential sale of the business.
Tension Among Ownership Teams
The last issue that I see all too often is when co-owners of a business aren’t getting along and they don’t agree on the sale. This can cause real problems, especially if one owner is tasked with getting the sale done, only to come to the very end of a long and expensive process and the other owner or owners get cold feet. Then you find yourself in a situation where more lawyers and more accountants are now involved and you’re stuck negotiating with your co-owners as well as the buyer. The sale of a company is something that absolutely must be agreed to ahead of time among owners to have any chance of this process going smoothly.
If you’re considering selling your business, the best thing to do is to think about these potential obstacles a few years out and plan on how you will avoid them when you still have the time to do so. At Richards Rodriguez & Skeith, our business and transactional attorneys have decades of experience assisting, counseling, and guiding business owners through the potentially treacherous pitfalls of selling their business. If this is a step you are considering a few years down the road, contact us today and find out how we can make the process smoother for all involved and even increase the latent value of your business.