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Selling Your Business: What to Include in Your Sales Agreement

On Behalf of | Jul 29, 2024 | Small Business

There are many reasons why one might sell their business: the economy may be doing well and an interested buyer has reached out with an impressive offer, or you might be pursuing a new endeavor, and letting go of a company might be the most practical decision.

Whatever the reason, it will require an understanding of the most crucial document in your transaction: the sales agreement. Your sales agreement contract legally binds you and your buyer to the terms and conditions of the sale. The agreement should include an offer, an acceptance, transparent terms, and an exchange of something of value (also known as consideration).

The sales agreement is also your first line of defense against associated risks and costly litigation. Ultimately, how well your sales agreement can protect you depends on your agreement’s representations and warranties:

Representations and Warranties

Representations refer to the statements you make about your business in the contract. These include essential information such as its finances, operations, assets, and liabilities. Your buyer will rely on this information when making their decision. If found false or misleading, it can have a severe negative impact on the buyer. This is where warranties come in. Warranties can act as a guarantee from the seller, promising to compensate the buyer for any harm or losses if a representation turns out to be incorrect.

Since accuracy is critical, sellers need to be as specific as possible. You can do this by adding:

  • Qualifiers: These are phrases like “in all material aspects” and “to the best of seller’s knowledge.” Qualifiers ensures that representations only cover statements that significantly affect the business or are within the seller’s actual knowledge.
  • Survival periods: Survival periods define how long the seller can be held responsible for any inaccuracies after the sale. For example, in a representation about intellectual property, you can say it will only survive 24 months after closing.
  • Caps and baskets: Caps refer to the maximum total amount of damages the seller is liable for in a breach of representations and warranties. Baskets, on the other hand, are the minimum amount of damages that a buyer must incur before the seller can be held liable. Both limit damages, safeguarding sellers from excessive costs during disputes.

While some sales agreements write their representations and warranties as a general clause, others prefer the security of having these statements in each section of the contract. Every business and transaction is different, so make sure that you have all your bases covered, including seeking legal counsel.

 

July 29, 2024.

 

 

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Arnett Law Group, LLC, was founded by Daniel J. Arnett, a trial lawyer with more than 25 years of experience.

The partners and associates at our firm are recognized leaders in their fields and are committed to delivering the best possible result for every client.