Selling Your Company: The Legal Readiness a Buyer Will Test

If a strategic has called, or a banker is circling, or there is a letter of intent sitting on your
desk, the single most useful thing to understand is which problems can still be fixed and which
cannot. Cap table defects, unassigned IP, how your contractors are classified, and customer contracts that
do not survive a change of control are all fixable — but on a nine-to-eighteen-month clock, not a
sixty-day one. Once a deal is live, they stop being cleanup items and start being price adjustments.

This is what a buyer's counsel will look for, in the order it matters, and what each item costs you in
time if you start now versus what it costs you in money if you start when the diligence request list
arrives.

Start with the specifics rather than the argument, because the argument only lands once you have seen
the arithmetic.

Every one of these is cheap and unremarkable eighteen months out, and every one of them becomes a
price term the moment a deal is live. That is the whole argument, and the rest of this section is
about why founders end up on the right-hand column anyway.

This is worth naming because founders tend to assume they were negligent, and they usually were not.

The early stage does not feel legal. A conversation, an NDA, a non-binding letter — none of it
looks like the kind of thing that needs a transaction lawyer, right up until the non-binding letter
turns out to have three binding paragraphs in it.

Nobody at the table is paid to slow it down. The buyer wants exclusivity. The banker's fee depends
on closing. You want the outcome. Counsel is the only participant whose job description includes
saying "not yet," which is also why counsel is the participant most often added last.

Your existing lawyer will not raise a hand. The generalist who formed the entity does not want to
say "this is past me," and may reasonably think reviewing an LOI is within reach. Reviewing it usually
is. Negotiating the disclosure schedules against a buyer who has done this forty times is a different
job.

You are running the company at the same time. Deal work is additive to a full-time job, so it
drifts to whoever is pushing hardest, and the person pushing hardest is on the other side.

Readiness has no trigger. Everything else on this list is prompted by an event. Getting the
corporate records straight two years early is prompted by nothing at all — which is why it is the item
that never happens, and why the founders who do it are almost always the ones whose CPA or banker told
them to.

Get the corporate record straight. The formation documents, every amendment, the current company
agreement, board and member consents for anything significant, and a cap table that reconciles to
them. Not a spreadsheet somebody maintains — a cap table that the documents actually support. This is
the item that most often reveals a second problem.

Find out what your own agreement says about a sale. Drag-along and tag-along rights, consent
thresholds for a sale of substantially all assets, preferred returns and liquidation preferences that
change who gets what, and any transfer restriction that a buyer will need waived. If you have
co-owners, this determines whether you can sell at all without their cooperation, and finding out
during exclusivity is the expensive version.

Talk to your CPA about structure before anyone talks about price. Asset sale versus equity sale,
rollover equity treatment, and the F-reorganization route each land differently on your after-tax
proceeds, and the difference is frequently larger than the negotiating range on the headline number.
This is coordination with your accountant, not a substitute for them — and it is the conversation that
has to happen before an LOI fixes a structure. Our piece on
Type F reorganizations in an Up-C structure
covers one common shape of it.

The price and structure in a letter of intent are usually expressly non-binding. Several other
provisions usually are not, and founders sign without separating them.

Exclusivity — the no-shop — is real and it is the provision that changes your position most. From
signature, you cannot talk to anyone else for the stated period. Everything you subsequently learn in
diligence, you learn while having no alternative. The length of that period and what extends it is the
most consequential negotiation in the document, and it costs almost nothing to negotiate.

Expense allocation, confidentiality, and governing law are typically binding too. So, sometimes,
is a break-fee or an expense-reimbursement obligation, and that one is worth reading twice.

And the non-binding parts still anchor. A price and a structure in an LOI are not enforceable and
are extremely difficult to move afterward. Re-trading down from an LOI number is a normal buyer
behaviour; re-trading up from one is not.

We have written this out at length in
the letter of intent as a business sale's operating system,
which is the piece to read before you sign one.

Three buckets. The bucket, not the topic, is the point.

Nine to eighteen months — start now or accept the discount

IP assignment from founders and contractors. The most common problem that cannot be fixed late.
If contractors built any part of the product and their agreements did not assign the work, the company
does not own it, and the fix requires locating people who may have moved on and asking them to sign
something for no consideration. A contractor who is asked to sign an assignment while a deal is
pending has excellent reasons not to hurry. Our piece on
IP diligence and contractor-built software covers what a
buyer's counsel actually asks for.

Worker classification. A buyer's counsel will ask how your long-tenured contractors are paid, and
why. A group on 1099s that works only for you is priced as an indemnity, an escrow, or a reduction.
Changing how they are paid is a tax and employment decision rather than a paperwork change, and it
takes quarters, not weeks.

Unresolved co-founder equity. A founder who left in year three whose exit was never papered. Options
promised in an email and never granted. A vesting schedule everybody remembers differently. Each of
these is a person whose signature you will need, and their willingness is inversely proportional to how
much they know about the deal. If this describes your company, read it alongside
redemption agreements in LLC and partnership exits —
and if the co-owner situation is contested rather than merely undocumented, that is
a co-owner who wants out before the sale, which is a different
workstream running in parallel.

Three to nine months — fixable, but not during exclusivity

Customer contract assignability and change-of-control provisions. Your top ten customers are a
large part of what is being bought. If those contracts require consent on a change of control, the
buyer needs those consents, and you are the one who has to ask — which means telling your largest
customers that you are selling, on the buyer's timetable rather than yours.

Landlord, lender, and licence consents. Same structure, less commercial sensitivity, similar
timeline risk.

Corporate records and minute book. Consents for actions that were taken but never documented.
Unremarkable to fix early; conspicuous to fix in a data room, because the buyer can see the dates.

Key-employee retention. The buyer is partly buying people. Who is under an agreement, what those
agreements say about departure, and who walks if the deal closes are questions a buyer will ask and
a founder should have answered first.

Weeks — the ones that only look urgent

Registered agent and franchise-tax standing. Insurance certificates. Domain and trademark records in
the company's name rather than a founder's. Bank signatories. Real items, small effort, and they
belong at the end of the list rather than the beginning — which is where anxiety usually puts them.

If you want the full version organised the same way, with a self-scoring section, that is what the
sell-side diligence readiness checklist is.

The purchase agreement will contain a long list of statements about the company, made by you. The
buyer is not paying for those statements because it doubts you. It is paying for a mechanism to
recover if one of them turns out to be wrong.

Three things decide how much personal exposure that creates.

Knowledge and materiality qualifiers. "To the Seller's knowledge" and "in all material respects"
are not stylistic. They are the difference between warranting a fact and warranting your diligence
about a fact, and they are negotiated rep by rep rather than globally.

The disclosure schedules. This is the part founders consistently underestimate, and it is where
the deal actually lives. A representation that says "there is no pending litigation, except as set
forth in Schedule 3.12" is only as good as Schedule 3.12. You are the only person who can populate
those schedules, they take longer than anyone plans for, and a disclosed problem is almost always
cheaper than an undisclosed one.

Survival and the recovery mechanism. How long each rep survives closing, what the buyer's
exclusive remedy is, and whether the escrow is the only place they can reach. Caps, baskets,
deductibles, and survival periods are the machinery here, and we cover them in
indemnification caps, baskets, and survival periods.

Escrow is straightforward in concept: a slice of the price is held back to secure the indemnity,
released on a schedule. What matters is the size, the release timing, and whether the buyer can offset
other claims against it.

Earnouts are where lower-middle-market deals go wrong, and the mechanism is always the same. The
seller is paid additional consideration if the business hits a metric after closing — and after
closing, the buyer controls the business. Four questions decide whether an earnout is upside or a
discount wearing a costume:

• Whose metric is it? Revenue is harder to manipulate than EBITDA. EBITDA after buyer-allocated overhead is not really a metric at all.
• Who controls the inputs? If the buyer can reassign your salespeople, change pricing, or fold the business into a division, the metric is theirs.
• What happens on acceleration? Sale of the business, termination of the founder, discontinuation of a product line — each needs an answer in the document.
• How is a dispute resolved? An earnout dispute with no accounting-arbitration mechanism is a lawsuit two years from now.

An earnout the seller cannot influence is a discount described as upside. Say the sentence to
yourself before signing one.

Selling a business does not take its non-compete outside the Texas statute.
Tex. Bus. & Com. Code § 15.50(a)
still requires an otherwise enforceable agreement and reasonable limits on duration, territory and
restricted activity, and § 15.52 makes the statutory criteria exclusive — older cases inform what
counts as reasonable, but there is no separate sale-of-business exemption.

The sale context does change how reasonableness is applied. A buyer pays for goodwill, including
the customer relationships that came with it, and a seller returning immediately to the market can
undermine the thing that was bought. Texas courts have accordingly been more receptive to lengthy
restrictions attached to a genuine sale than to ordinary employment restrictions (Heritage
Operating, L.P. v. Rhine Bros., LLC, No. 02-10-00474-CV, 2012 WL 2344864, at *4–6 (Tex. App.—Fort
Worth June 21, 2012, no pet.) (mem. op. on reh'g)).

There is no safe number. Chandler v. Mastercraft Dental Corp. of Texas, Inc., 739 S.W.2d 460,
463–65 (Tex. App.—Fort Worth 1987, writ denied) affirmed a five-year restraint. Heritage rejected a
finding that a negotiated ten-year restriction was unreasonable on the evidence presented. Applying
Texas law, the Fifth Circuit upheld nationwide coverage for a business that marketed and sold
nationwide (Vais Arms, Inc. v. Vais, 383 F.3d 287, 295–96 (5th Cir. 2004)) — persuasive, not
binding on a Texas state court. And those are separate holdings on separate questions:
Heritage decided duration, Vais decided geography. Neither approves a ten-year nationwide
covenant.

If you are staying on after closing, which agreement the covenant sits in matters. Staying on as
an employee or consultant does not automatically convert a sale covenant into an employment one.
Chandler itself involved sellers who stayed on under separate agreements, 739 S.W.2d at 462–63.
What matters is the primary purpose of the agreement the covenant sits in, and it decides who carries
the burden: for a personal-services agreement, the party enforcing must prove enforceability;
otherwise the restrained party must prove it is unenforceable (§ 15.51(b)). Where a sale and a
services arrangement run together, the documents should say which restriction belongs to which.

The longer treatment is in Texas non-competes after the FTC rule.

The price you agreed is adjusted at closing for working capital, debt, and cash. The working capital
adjustment is the one sellers understand least and it is arithmetic rather than judgement: a target
level — the peg — is set, and you are paid more or less depending on where actual working capital
lands against it.

Two things decide the outcome, and neither is the peg number itself. The definition of working
capital — which accounts are in, how receivables are aged, how deferred revenue is treated — moves
more money than the peg does. And who prepares the closing statement, on what timetable, with what
dispute process.

Working capital adjustments in M&A transactions
walks through the mechanics with numbers.

The sequence matters and the common one is wrong.

The CPA comes first, before there is a deal, because the structure question is theirs and it
determines your after-tax outcome. Counsel comes second and earlier than founders expect — the
cheapest place in a transaction to add value is the LOI, and the second cheapest is the readiness work
before there is an LOI at all. The banker runs the process, and a good one is worth their fee for
the competitive tension alone. Nothing here suggests you do not need one.

What goes wrong is the order reversing: banker first, LOI signed, counsel introduced during
exclusivity to review a document whose structure is already fixed and whose deadline is already
running.

For a sense of what the process looks like end to end, our
sell-side series for Texas founders
runs through it in order.

Hypothetical. Not a client matter, not a real company, and the numbers are constructed to show the
mechanics.

A founder owns 82% of a Texas LLC providing managed IT services to healthcare practices. Two former
employees hold 9% each from a grant made in year four. Revenue is $11M with roughly $2.4M of adjusted
EBITDA. A strategic buyer that has acquired four similar businesses calls in January and offers
"around 6x" — call it $14.4M — subject to diligence.

What the founder does. Signs an NDA. Has three calls. Receives a two-page LOI in March with a
90-day exclusivity period, signs it, and calls a lawyer the following week.

What diligence finds in April and May.

The 9% grants were documented in a board consent that was never signed. One of the two former
employees now works for a competitor and is not returning emails.

The company's scheduling software was built between 2019 and 2021 by an offshore contractor. The
contract has a work-for-hire clause and no present assignment, and the contractor's entity has since
dissolved.

Four of the top eight customer contracts require written consent to a change of control. Two of the
four are with practices that have been approached by the buyer's existing portfolio company.

Six field technicians are paid as 1099 contractors, work exclusively for the company, and use company
vehicles.

What happens to the price. The buyer does not walk. Buyers rarely walk over these; they reprice.
The revised proposal keeps $14.4M as the headline and restructures it: $1.8M into an eighteen-month
indemnity escrow covering the IP and classification exposure, $2.0M converted into a two-year earnout
tied to retained revenue from the top eight customers — the same customers whose consents are
outstanding — and a specific indemnity for the contractor classification with no cap.

The arithmetic. Nothing about the headline changed. The founder's certain proceeds at closing
went from $14.4M to $10.6M, and $2.0M of the remainder now depends on customer retention the founder
no longer controls.

What each item would have cost eighteen months earlier. A signed consent and a stock power. One
conversation with a contractor who still existed. Assignability language negotiated into four
contracts at renewal, when nobody was selling anything. A classification review and a decision.

The lesson the hypothetical is built to carry: none of these were hard problems. Every one of them
became expensive on the day exclusivity started.

If you are eighteen months out, the useful move is the
sell-side diligence readiness checklist — it is the same
three buckets as above, in full, with a self-scoring section, and it is written to be useful whether or
not you ever hire a lawyer.

If you have an LOI in front of you, the exclusivity clock is already the constraint, and the
conversation worth having this week is about what is in the binding paragraphs.
Request a consultation.

If you are the CPA, banker, or wealth manager who found this for a client: the readiness checklist is
the forwardable version, and it makes no mention of engaging anyone.

Disclaimer. This publication is provided by Amini & Conant, LLP for educational and informational purposes only and is not intended and should not be construed as legal advice. Should the reader seek further analysis of the subject matter or answers to specific questions about the subject matter, please contact the author at neema@aminiconant.com. This publication is considered advertising under applicable state laws.

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