Selling a business is a process that involves different specialists, from advisors and financial and tax experts to appraisers and lawyers. The legal side, while it may be the most technical, is also the most important. It's even more important than the financial side, because if the agreement doesn't comply with the regulations in force in the country or countries involved, the deal could be invalidated, and the parties could even face various penalties. To avoid these regulatory issues, let's look at the legal issues to consider when selling an SME so the process is successful.
Advance planning
Advance planning usually begins at least a year before the formal start of the sale process. At this stage, key deadlines are set, specialized professional advisors are hired, and internal audits are carried out, along with the adjustments needed to prepare the company for the next steps.
This stage also marks the start of the first strategic reports on the business. These documents include an internal analysis that lets the current owners understand the real state of the company, and a document called a teaser aimed at potential investors, which highlights the business's strengths and opportunities to capture their interest.
Letter of intent (LOI)
The letter of intent, known as an LOI, is a preliminary document that formalizes the parties' interest in reaching an agreement. It can be binding or non-binding, and its main purpose is to structure the talks and align expectations from the start of the negotiation, setting out a clear roadmap for the process.
Although it may share similarities with a confidentiality agreement, the two aren't equivalent. The LOI covers broader aspects of the negotiation, while confidentiality focuses on protecting sensitive information. At this point, the legal side plays a crucial role in ensuring the document reflects the interests and commitments of both parties.
Non-disclosure agreement (NDA)
Before moving on to due diligence or signing the purchase agreement, it's common to sign a confidentiality agreement, or NDA (non-disclosure agreement). This document is essential in the business sale process, since it establishes a secure framework for sharing sensitive information confidentially, protecting the company from potential risks or misuse.
Under this agreement, the parties undertake to keep the information provided to them strictly confidential, given the inherent sensitivity of this type of transaction.
Due diligence
Due diligence is commonly associated with an in-depth financial review of a company, evaluating key elements such as assets, liabilities, revenue, profit, and the balance sheet. This analysis details the company's accounting position, but it also extends to the regulatory sphere — known as legal due diligence — where the organization's legal and contractual compliance is assessed.
At this stage, in addition to the financial statements, current contracts are reviewed, including employment agreements, supplier agreements, and other contractual obligations. This regulatory analysis aims to identify potential risks or irregularities and gather all relevant information about the company's commitments.
Due diligence isn't limited to an internal analysis; it also examines external factors. This includes verifying whether the company's activity complies with local and national regulations, as well as identifying potential legal conflicts, such as administrative litigation.
Once this legal snapshot is complete, the legal viability of the deal is assessed. In some cases, especially in large mergers and acquisitions (M&A), it may be necessary to obtain approval from competition regulators, particularly if the investor or the interested company is based outside Spain.
This stage is essential in the sale process, since it ensures that both the parties involved and the deal itself are protected and aligned with the relevant legal and financial frameworks.
Purchase agreement
Once legal approval has been obtained for both the company and the deal, the purchase agreement is drafted. This document is crucial, since it defines the fundamental terms and conditions to ensure a secure transaction and avoid potential lawsuits or disputes in the future.
At this stage, it's essential to address key aspects such as the sale price, payment terms, and the roles buyers and sellers will take on after the transaction. In addition, all the clauses and agreements negotiated between the parties must be included and clearly reflected in the agreement.
The agreement must also comply with the laws of the country where the deal takes place. Finally, it's essential to specify the warranties the seller provides to the buyer. These warranties are key to protecting the buyer, who can bring legal claims if they're breached, which could lead to lawsuits against the former owner.
A solid, well-structured purchase agreement is the foundation for a successful, smooth transfer of ownership of the SME.
