In my experience with helping my clients negotiate the buying or selling of their business, whether to a third party, or to their soon-to-be ex-partner, the same pitfalls arise time after time. But, by understanding what they are and how to avoid them, you can go into the sale confidently. As always, the devil is in the details and you need experienced legal counsel to draft your terms.
Below are my top three tips for avoiding the most common mistakes that befall sellers.
- Carefully craft the non-compete provision
If there is a non-compete provision, be sure to carve out your ability to pursue any business idea you might want to pursue following the sale of your business. The carve out to any general bar on competition should create an exception to that allows you to work for, work on, consult for, or invest in any business you would like to invest in. Additionally, the non-compete should include the specific timeframe that you are prohibited from certain activities, such as operating a similar business and the geographic scope. Ideal you should negotiate for a non-compete lasting less than three years and effective within the smallest geographic location as you can negotiate.
- Get as much of the money up front as you can.
Your buyer might not run the business the way you ran it. If the payments are stretched over time, the buyer may eventually have trouble making the payments. Getting as much of the purchase price upfront will allow you to enjoy yourself or invest in another venture. If your payments are stretched over time, make sure that the deal is secured by the assets being purchased, and by other available collateral.
- Hold the buyer personally accountable.
When the buyer signs the purchase agreement, you want them to sign it both on behalf of their company and as an individual. This is so you can easily hold them personally accountable for the agreement and not be hindered by the protections afforded businesses or if the business is dissolved.