When large corporations like Amazon or Uber “go public,” it makes national news. However, selling shares of a company isn’t just an option for huge conglomerates. It’s also a great way for smaller business to raise capital and grow—though many chose private investment options over public ones. In recent years, the U.S. Securities and Exchange Commission (SEC) has grown increasingly stringent with regulations regarding the buying and selling of stock—regardless of the size of the company. Thus, before you make the decision to sell partial or complete ownership of your business, it’s important that you understand what you’re getting into and that you have the proper protection in place.
Why Should I Sell?
Well, that really depends on your situation. Many companies sell stock to pay off debts or raise money to purchase new equipment, recapitalize a previous investment, or even buy out competitors. If you’re at a point where your need for liquid assets is greater than your need for illiquid assets, then this is a great option that could still allow you to retain control of your business if structured properly. From an investment standpoint, it can also be a great way to diversify. As a business owner, if you’re putting all available funds back into the business, then you’re essentially only investing in one possible revenue stream. By selling some stock, it can enable you to free up capital to invest in other ventures.
Additionally, some owners use it as a means to transition. By selling stocks gradually, you can legally transfer ownership of the company to a successor without needing to pay gift taxes, reduce your lifetime gift tax exemptions or enter into a formal buy-sell agreement. Unfortunately, this transition isn’t always deliberate. At times, owners are forced to sell their majority ownership interest to salvage the business or avoid bankruptcy.
What Do I Need to Make It Official?
Before any stock officially changes hands, it’s important that you have a stock purchase agreement in place as well as a formal stockholder’s agreement. These legal documents exist to protect both the buyer and the seller before consummating the deal and spell out the terms after the deal is consummated. The stock purchase agreement details all aspects of the sale before it even takes place, including, but not limited to:
- The name of the company
- The buyer’s name
- The price per share
- The amount of shares being sold during this transaction
- The location of the sale
- All representations and warranties associated with the deal
- Indemnity for potential issues in the future
Typically, this is preceded by an official letter of intent (LOI), so that all of these details can be finalized before the agreement is drafted. If you follow these procedures with the guidance of an experienced lawyer, you should be able to avoid many of the misunderstandings that can result in expensive court battles later on. The stock purchase agreement is designed to give both parties additional time before anything is completed to review and/or revise details of the sale. It can also help to close the deal itself by giving the buyer more faith in the legitimacy of the exchange.
Should you choose not to enter into this legal contract before trading in privately owned stock, you can encounter multiple issues later on —and not just with the new shareholders. Many of these deals have tax implications that are often spelled out in the stock purchase agreement. Without one in place, it may not be clear who will be receiving certain tax benefits and/or liabilities, resulting in filing issues on one or both sides. Additionally, if there are any issues with the sale, the SEC can investigate, which often disrupts business operations and can derail future stock purchases.
To ensure the greatest chance of success of your entry into the sale of stock, and ultimately your business, it’s best to seek competent legal advice before initiating any such changes. Our team at The Law Offices of Kirk Halpin & Associates, P.A. is well-versed in drafting and negotiating stock purchase agreements and stockholder agreements that will keep you compliant with all current regulations and minimize future disputes later on. We work with a wide variety of businesses, including manufacturing businesses, IT companies, restaurants, transportation services and real estate investment firms, so feel free to contact us today!