When receiving an offer to sell a company in Texas, it’s crucial to understand the multifaceted considerations involved in the process. Each step requires careful thought and strategic planning, from deal structures to tax implications and internal approvals. While each deal is different, this is a general guide to the essential elements for better ensuring a smooth and successful transaction.
Potential deal structures
A critical step in the process is to determine the deal’s structure. The three primary structures are asset sales, equity sales and mergers. Here is a very brief overview of each:
- Asset sale: The buyer purchases some or all company assets. This structure lets the buyer cherry-pick valuable assets while aiming to leave unwanted liabilities behind. However, as with any structure, this may have significant tax implications for both parties.
- Equity sale: An equity sale involves the buyer purchasing the company’s shares or membership interests, effectively taking over ownership. Closing a deal with this can be less cumbersome because each individual asset and contract does not need to be assigned, but tax considerations must be addressed and typically the business is transferred with all existing liabilities intact.
- Merger: In a merger, two entities or more combine . This structure is somewhat similar to an equity sale and is often chosen for tax reasons.
Each structure has advantages and disadvantages, so the best choice will be specific to the deal’s unique circumstances.
Tax implications must be considered
Tax considerations play a pivotal role in the decision-making process. The deal’s structure will affect the tax obligations for both the buyer and the seller. Consulting with a business law attorney is essential to understanding the potential tax consequences and structuring the deal in a tax-efficient manner.
Internal approvals and equity holders
For many businesses, obtaining approvals from internal stakeholders such as the owner group is critical. This process ensures that the necessary players are on board with the transaction and helps prevent or predict potential disputes. Sometimes everyone may not agree, which can complicate the transaction.
Third-Party Consents and Contractual Relationships
Another important aspect is assessing any required third-party consents such as those related to contractual relationships. Many contracts, such as loans, leases, supplier agreements and customer contracts, may require consent from the other party before they can be transferred to the buyer or a change of control can occur. Identifying and planning to secure these consents early in the process can prevent delays and complications.
Due diligence
Providing accurate and comprehensive information about the business is essential for the due diligence process. Buyers need to scrutinize all aspects of the business such as the company’s financial health, operational performance, contracts, insurance, employment matters, and actual and potential liabilities. Ensuring your financial and other records are in order will facilitate better due diligence.
Communication with key personnel
The timing of disclosure to personnel should be carefully controlled. Communication with the core group of key personnel during negotiations may be crucial for maintaining stability and morale when the company’s future is unclear. Transparent and timely communication can help allay uncertainty and ensure essential employees remain engaged and committed throughout process.
Key negotiation points
The economics of the deal are, of course, paramount. But, other key provisions include indemnification terms and non-compete covenants:
- Indemnification: Indemnification terms protect the buyer against potential losses arising from certain risks, losses, liabilities. Clearly defining and limiting the indemnity obligations can help mitigate risks.
- Non-compete covenants: For founders and key executives, non-compete covenants are often required. Generally, these provisions prevent people from participating in a competing business within a specified time period .
Real estate considerations
Real estate considerations, such as sale or lease agreements, transfer of property ownership and diligence including possible environmental assessments, may be material to the transaction. Ensuring that these aspects are addressed can prevent potential future legal and financial issues.
Professional business guidance is vital
Navigating the complexities of selling a company in Texas requires effective planning and experienced guidance. Working with the right business attorney can better ensure that every aspect of the transaction is handled professionally, paving the way for a successful sale.