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Due Diligence
An offer to purchase or a letter of intent will generally include a contingency regarding verification. The buyer (or his or her advisors) will have the right to examine the books, legal agreements, market data, and other information that is relevant to the company. This examination process is called the due diligence process. This means a buyer has the responsibility to exercise due diligence or appropriate care and caution, in investigating the seller's property, records, financial data, market data, etc.
If the seller provides the information without withholding damaging facts, and the buyer does not properly evaluate the information, it will be very difficult to hold the seller responsible after the business changes hands. If, for example, a seller gives a buyer 100 pages of documents during the due diligence process and a page buried within details the fact that an important customer is going out of business, it is the buyer's responsibility to review the information and make a decision as to whether or not to proceed. The buyer would not be able to later sue the seller saying that he never pointed this fact out.
Purchase And Sale Agreement
This is the detailed document that spells out the final agreement between buyer and seller. This document is prepared by either the buyer's or seller's attorney with review by the other attorney. While in some cases this document is not signed until the closing, it is usually signed before the closing date. It is common for a second deposit to be tendered by the buyer at the time of signing this agreement. This deposit, along with the deposit from the original offer to purchase becomes a down payment toward the purchase price.
Non-Compete Agreements
Most buyers insist that a seller agrees not to compete with the new buyer for a minimum period of time. Generally, non-compete agreements are for two to five years. For a non-compete agreement to actually stand up in court, it must be significantly limited in scope. If, for example, a seller of a retail clothing store agreed not to compete in the retail clothing industry anywhere in the US for five years, a judge would probably rule the agreement too broad and invalidate it. Note that the judge will not alter the agreement, but he will invalidate it completely, meaning at that point the seller would be free to compete with the business he sold, even to the extent of opening up right across the street. The rationale guiding non-compete agreements is that a person can not be overly restricted in his or her right to earn a living in a free market system. Seldom are non-compete agreements serious impediments to closing a deal.
Attorney's Fees
Even for a very small business, the legal expenses entailed in selling it are substantial. It can easily cost several thousand dollars to have the agreement(s) drawn, for advice on the way, and for the actual closing. Of course the purchase and sale agreement is a major part of the expense. If the buyer's lawyer draws that agreement, your legal bill will be lower, but it may be false economy. Many sellers feel they will be better protected if their own lawyer draws the agreement.
Ask the lawyer about his hourly rate, the hourly rates of his associates and how much he anticipates the total transaction will cost. A $1,000,000 sale can cost tens of thousands of dollars to complete, which you should know up front. If the sale falls through you are still responsible for the attorney's fees.
Choosing An Attorney
If you already have an attorney with whom you are happy, by all means use that attorney. However, like your accountant, your attorney may not relish the prospect of losing a client and may, therefore, be less motivated to see the transaction close than you would like. You must make clear to your lawyer that you want to see the transaction go smoothly and to completion.
If you don't have a lawyer or your lawyer has not had a lot of experience in this area, find an attorney who is experienced in small business issues, especially the buy/sell process. Don't be afraid to ask a prospective attorney if he or she has been involved in a number of such transactions before. A lawyer who does a lot of business transactions will not only have the experience to protect you, but he or she will also be in a better position to get the work done quicker, and at lower cost (fewer hours spent).