Last Updated on February 16, 2023 by lukesguide
Selling an online business can be a daunting process, especially if it is your first time!
Just thinking about what legal documents are needed to complete the sale can make a seller’s head spin!
Reading and understanding legal documents can be an intimidating task.
However, with a little preparation, you can develop a basic understanding of the key legal documents that you are likely to come across when listing your online business for sale.
In this article, we will explain why legal documents are important when selling an online business and guide you through the types of legal documents you will likely come across when selling an online business.
Why Are Legal Documents Important When Selling An Online Business?
While most buyers and sellers go into a business sale process with the best of intentions, sometimes misunderstandings occur and things can go wrong.
This is where well-drafted legal documentation is crucial as it protects the interests of the buyer and seller.
The purpose of the legal documentation is to act as a written record of both parties’ rights, responsibilities, and obligations so that there can be no confusion if a dispute arises.
In the context of a business sale, the legal documents will usually cover things like:
- The rights and responsibilities of the parties when sharing business information with one another.
- The terms of the business sale agreed upon between the parties, including the:
- purchase price payable;
- business assets to be included in the sale
- timing for completion of the sale; and
- any assurances provided by each party to the other.
- Any post-acquisition arrangements for the outgoing seller to support the new buyer get up to speed on how to run the business.
- Any restrictions on the seller from competing with the buyer and the business after the sale has been completed.
Getting the drafting of these documents right can be tricky and it is worth engaging a lawyer from the best online law firms to help with your legal documentation.
What Legal Documents Are Commonly Used When Selling An Online Business?
While every online business sale is different, there are some common legal documents that you may come across when moving through the different stages of the sale process. We have summarized the key legal documents below.
Confidentiality Agreement (Or Non-Disclosure Agreement)
A confidentiality agreement or non-disclosure agreement is typically the first legal document a potential buyer will need to sign.
The purpose of the confidentiality agreement is to set out the rules under which the parties may receive and disclose ‘confidential information’.
A seller will almost always require any potential buyers to sign a confidentiality agreement before the buyer is provided with sensitive business information (such as net profit, cash flow, customer base, etc).
Sometimes the confidentiality agreement will apply to both the buyer and seller (i.e. a two-way confidentiality agreement) or just the buyer (i.e. one-way agreement).
For sellers, some of the key things you will want in your confidentiality agreement include:
- a definition of ‘confidential information’ that is broad enough to cover all types of information you propose to provide to potential buyers;
- a clear ‘permitted purpose’ and list of ‘permitted persons’ to which the buyer may disclose the confidential information; and
- a sufficient period of time for the non-disclosure obligations to continue in the event potential buyers do not end up buying the business.
Terms Sheet (Also Known As Heads of Agreement)
A terms sheet is a non-binding document that sets out the key terms of a proposed business sale arrangement between the parties.
A terms sheet is typically used in early negotiations and provides a high-level framework (usually no more than one or two pages) for the parties to work towards when negotiating the more specific terms of the business sale.
While it is not binding, a terms sheet can give a seller confidence that a buyer is serious about buying the business before moving to the next stage of negotiations and incurring further costs.
Sale And Purchase Agreement
A Sale and Purchase Agreement, such as an Asset Purchase Agreement or Stock Purchase Agreement, is a written agreement between a buyer and a seller which sets out the terms that govern the sale and purchase of a business.
Every Sale and Purchase Agreement is different but there are some standard terms and clauses that you will find in almost every Sale and Purchase Agreement.
- Recitals: The recitals of an agreement provide the context and background to a business sale. This usually includes a summary of what the contract is for, who the parties are, and who is required to do what under the agreement.
- Sale and Purchase clause: Usually short and sweet, the sale and purchase clause includes the core rights and obligations of both parties under the agreement (i.e. for the seller to sell and the buyer to buy, the business).
- Purchase Price: This clause usually includes things like the purchase price amount to be paid, how the buyer must pay it, and when it needs to be paid.
- Representations and Warranties: The representations and warranties are the promises or assurances provided by one party to another under the agreement.
- Indemnity: In its most basic form, an indemnity can be described as a promise given by one party to the other party, to reimburse the other party if they suffer a loss.
- Termination: Most agreements have a termination clause that allows a party to terminate if the other party breaches the agreement and fails to remedy the breach. Sometimes there is a mutual termination clause where both parties agree in writing to terminate and go their separate ways.
- Dispute Resolution: Sets out the process for dispute resolution, such as choice of forum, timeframes, and costs.
- Governing Law: Records the parties’ choice of which country’s laws will govern the terms of the agreement.
Transition Services Agreement
It is often the case that a seller will be asked to provide some post-acquisition support to the buyer to help them hit the ground running with their new business.
Even if the buyer has some experience running an online business, it is worth formalizing the post-acquisition support arrangements in a Transition Services Agreement.
A Transition Services Agreement should include details about:
- The scope and nature of the support services the seller is expected to provide.
- The duration of the support services.
- Whether the seller will be compensated for their time.
- The level of access to information and systems that the seller will have during the term of the support services arrangement.
If you are buying a business from someone, the last thing you want is for them to take your money and just set up a new business in competition with you.
This is why it is a good idea to ensure the seller enters into a Non-Compete Agreement.
The purpose of the Non-Compete Agreement is to protect the goodwill of the business and to give the buyer comfort that there will be ongoing value in the business when they take over.
A Non-Compete Agreement will usually include specific terms that restrict the seller from starting a business or working with a competing business within a pre-defined area and for a certain period of time.
A Non-Compete Agreement may also include specific undertakings from the seller to not solicit or approach employees, customers, or suppliers of the business it has sold.
Well-drafted legal documents are a must-have whether you are selling a drop-shipping business, Amazon FBA store, Shopify store, website, marketplace, or any other type of digital asset.
As a seller, you want to make sure you receive your funds in a timely manner and are protected against any future claims made against the business after you have sold it.
For buyers, you want to make sure that you obtain clear title to the business assets you are buying and the value of the business you are buying is protected well into the future.
Legal documents formalize these matters and help to allocate risk appropriately between the parties.
It is worth engaging an experienced lawyer to help guide you through the sale process and draft your legal documents. While it may appear costly to engage a lawyer, the price for not obtaining expert advice could be much higher in the long run.
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