Confidentiality Agreement – You should never disclose any information about your company before receiving a signed confidentiality agreement. A well drafted confidentiality agreement will protect you from unethical and unprofessional buyers in most situations.
There are several reasons why you would want to protect the confidential financial and other information of your company. Disclosure of information about your business processes or the way you perform certain functions could eliminate a potential competitive advantage that you have in your market and make your company less valuable. Additionally, sometimes in the early stages of a sale transaction, the information about your sale may not be public and the disclosure of that information may have a chilling effect on employee morale.
The confidentiality agreement should be drafted to protect the very valuable interests of the seller, and provide for remedies in case of a breach.
Letter of Intent – A letter of intent summarizes the basic economic terms and conditions as agreed by the seller and buyer before the negotiate all of the details of the purchase contract. Generally, the Letter of Intent identifies the parties, states the purchase price, the method of payment and the structure of the transaction – whether it will be a merger, stock purchase or asset purchase.
The Letter of Intent may also include language addressing certain contingencies. For example, the basic agreement may be contingent on the buyer securing financing or the buyer conducting further due diligence. A Letter of Intent may be binding or non-binding. Non-binding Letters of Intent are typically in the seller’s best interest, because very critical warranties and representations may have yet to be ironed out and the buyer can threaten litigation on the binding Letter of Intent in order to force the seller to concede on an important issue. A business in litigation is a business that is almost impossible to sell, and most likely can not be sold at fair market value.
Representations and Warranties – Representations and warranties are statements about the company made by the seller to the buyer. The buyer relies on the truth of these statements about the company in making the decision to buy the company and on the price to be paid. Representations and warranties are an important part of the final sales contract.
A buyer is entitled to know everything about the business from the day it started up until the moment that the sale is complete. There are some things that a buyer will not uncover through their own due diligence and will need to rely on the seller’s statements in making its decision. The seller’s attorney must ensure that the representations and warranties are reasonable.
Personal Indemnity Agreement – In many transactions involving the sale of a closely held business, the seller may be required to sign an agreement personally indemnifying the buyer. That is, the seller agrees to pay certain amounts to make the buyer whole if the seller breaches any of the warranties and representations. For this reason, it is very important that the seller’s attorney vigorously negotiate and carefully review the language in the representations and warranties, and ensure that the final language in the indemnity agreement matches what was agreed-to during negotiations.