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What Legal Contracts Will I Need?
By Quiet Light
The goal of any transaction should be to make a deal that is safe and secure and benefits both parties. In order to obtain this goal we should first and foremost work in our upfront preparation and have an exhaustive discovery/due diligence in order to ensure both parties work well together and understand each other. However, because significant assets are at stake – in the form of a valuable website (seller) and in the form of cash (buyer) – governing a transaction with legal documentation is absolutely necessary.
The goals of putting in place legal documents should be:
- To create a structure under which due diligence is conducted in order to have the deal completed in a reasonable and timely manner.
- To clearly define the scope, terms, compensation, and understanding of what is being sold, what the buyer’s obligations are, and what the seller’s obligations are.
- To protect against fraudulent activity.
- To provide a process of remedy should that understanding be violated.
Legal documents can be expensive and tricky to draft. At Quiet Light, we offer our buyers and sellers templated legal documents that they can bring to their attorneys in order to reduce the cost associated with drafting the legal documents. Of course, we always recommend that both the buyer and seller utilize an attorney. Our templates were drafted – and are refined yearly – by attorneys to make sure they are as sound and neutral as possible.
Below are just a few of the most common documents you can expect to run across in selling your website (either with Quiet Light or not).
Letter of Intent
A letter of intent provides the general framework of a final transaction. Although it is not a binding contract like the final purchase agreement, it does carry some legal weight.
General items which are agreed upon in the letter of intent would be the expected final price, expected closing date, a period of exclusivity to allow the buyer to do due diligence in an environment without competitive pressure, and any key elements of a final purchase agreement.
If everything was accurately disclosed before the letter of intent, the final purchase agreement should mirror the terms in that letter. Should there be significant differences – the financials are different or significant details were not disclosed prior to the letter – a final purchase agreement may try to account for these differences (if the deal is completed at all).
They key to making sure a letter of intent leads to a final purchase agreement is ensuring all relevant details and information is presented and is accurate and verifiable.
Asset Purchase Agreement
An asset purchase agreement is the master of all documents and is by far the most important document you will sign in relation to your sale. This agreement governs acts as the binding and full agreement governing your transaction. Any other closing agreements (non-compete agreements, asset allocation agreements, promissory notes) are agreed to in light of this governing agreement.
With our recommended process, we hold the purchase agreement to the end of due diligence because of its importance. The work and effort of this agreement should be expended only when the deal is certain to occur since this will recognize your biggest expense with an attorney.
In some transactions a conditional asset purchase agreement is presented to replace the letter of intent. The goal here is to negotiate the key items before spending the time and energy on due diligence which can be taxing on both the buyer and the seller.
Many transactions will have no need for a promissory note. Any transaction, however, that involves owner financing should have this agreement in place. This agreement dictates and determines the amount, payment schedule, interest rate, and default options of any owner financing extended to the buyer.
A promissory note should be tied directly to a purchase agreement so that it has the context under which the note is extended.
Key to any sale is the tax implication. The asset allocation is an agreement between the buyer and seller as to how the acquisition funds should be applied. The acquisition document itself is not a complex document, but its implications can be significant from an accounting standpoint.
It is the firm recommendation of Quiet Light that each buyer and seller consult a tax attorney or accountant as to the implications of the asset allocation for their deal before an offer is received or accepted.
In the standard purchase agreement we offer as a template, we encompass a non-compete agreement within that document itself. But of all of the common changes attorneys make to our standard purchase agreement, one of the most common is to separate the non-compete agreement out into a separate document. Doing so adds force and allows the non-compete to be more fully defined.
Sellers should always expect some form of a non-compete agreement when they are selling a website that has seen substantial success. Buyers need to have sufficient space in order to earn a return on their investment. To have a previous owner competing directly against them would be simply unfair.
Bill of Sale
The bill of sale is essentially a receipt acknowledging the receipt of assets and acknowledging the receipt of funds as directed by the purchase agreement. It exists to nullify any claims of a lack of delivery, and as such should be signed only when the closing funds and closing assets have been received by each party.
Every deal is unique, and every buyer/seller will have unique needs. Often times these will require unique documents and agreements such as consulting agreements or lien waiver agreements.
When selling your website, you should expect – and request – that legal documents govern the transaction out of the best interest of your protection and the protection of your buyer. Although attorneys fees represent an added cost, adding them to the time of a transaction greatly reduces the potential for a lawsuit that would cost significantly more.