Draft the disclosure documents required to sell your business and begin engaging with buyers.
Objective
Protect yourself and your business.
Tasks
Create four documents for use with buyers and their advisors. Have them reviewed and approved by legal counsel. The four documents are:
- Corporate Resolution to Sell
- Non-Disclosure Agreement (NDA)
- Seller’s Disclosure Statement
- Letter of Destruction
Best Practices
These four documents should be prepared with care. Read them carefully. Make sure you understand every provision.
Corporate Resolution to Sell: Every owner of the business should sign a resolution authorizing the sale of the business. This includes businesses owned by a husband and wife, or by other family members. Buyers will often request this document because they have been burned in the past when one of the owners shows up at closing and announces s/he didn’t authorize the sale and is not signing the purchase and sale agreement.
A Corporate Resolution to Sell is legally-binding on the owners of the business. If one of the owners changes his or her mind and tries to hold up the sale, the other owners can legally proceed with the sale without fear of recrimination. Conversely, if all the owners change their mind and decide not to sell and the buyer relied on the resolution to invest time and money to acquire the business, the business could be compelled to sell, and/or be held liable for the buyer’s time and expenses.
Buyers have been burned in the past when seller’s purport to be selling the business but are not committed to doing so. They simply want to get a sense of what their business is worth and who might be interested in buying it. Smart buyers know this tactic. They will insist on seeing a signed Corporate Resolution to Sell BEFORE making an offer or investing time and resources into due diligence.
Non-Disclosure Agreement (NDA): The NDA is used with interested buyers before you disclose confidential information about your business, including the name and location of the business. It often includes “non- circumvention” language that prevents prospective buyers from trying to pilfer your customers or employees.
It’s usually not a good idea to disclose you are selling the business or share any details with any party unless they have signed your NDA. The best practice is to limit the people who know you are selling to “need to know” only. Finding out you are selling the business could lead to disruptions with employees and customers. It could spur competitors to circulate rumors that you are going out of business. The NDA helps to minimize the people who know you are selling and legally prevents them from disclosing that information to others.
Sometimes, the NDA can be mutual, meaning the buyer will also share confidential information with you and you agree not to use it or disclose it except for the prescribed purposes. The language in an NDA typically holds others who are party to the transaction also liable in the event of breach. For example, if a prospective buyer discloses your confidential information to an adviser, such as an accountant, and that adviser leaks the information to your customers or competitors, the buyer and the adviser could be held liable. Conversely, if the NDA is mutual and one of your employees inadvertently leaks confidential information about the buyer to others, YOUR company could be held liable.
Be sure to treat all information in strict confidence and only share it with trusted parties on a need-to-know basis. Insist that prospective buyers do likewise with your confidential information.
Seller Disclosure Statement: This document discloses any material facts about your business that a buyer should know, especially facts that may impact the valuation of the business. This might include material regulatory, permitting, or environmental issues. It may also include pending or threatened legal action. This document is signed by the CEO/Owner and is legally binding.
Not every buyer may request to see this document, but the smart ones will. Always best to be out ahead and anticipate a buyer asking for a Seller Disclosure Statement. As a matter of good business practice, it’s always best to be forthcoming about any existing or threatened issues that may negatively impact the business. It will save both parties a lot of time and unnecessary expense later.
Letter of Destruction: This document is used to ensure that prospective buyers destroy any confidential information you shared with them. The NDA usually includes a provision that says the recipient will return or destroy confidential information upon terminating discussions and interest. Once a prospective has “passed” on your deal, ask them to either return your materials, and /or sign the Letter of Destruction.
Tools and Tips
The disclosure documents are expected by most buyers. They are legally-binding and should be prepared with care and reviewed by an attorney practiced in their application. Some law firms and business brokerages may provide samples for free download. All samples, including those in this book, should be reviewed and approved by your legal counsel before sharing them with other parties.
Summary
Seller Disclosure Documents are not required in every selling situation, but they are a good practice and expected by most buyers. It’s good to have them ready. Have them reviewed and approved by your legal counsel before sharing them or signing them.
Examples
- Corporate Resolution to Sell
- Non-Disclosure Agreement (NDA)
- Seller Disclosure Statement
- Letter of Destruction