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Identify Potential Conflicts When the Family Business Is Sold

Identify Potential Conflicts When the Family Business Is Sold

signing an agreement, business attorney

Selling the family business is often complicated due to the various interests and conflicting positions that may arise and identifying potential conflicts in advance can help ensure that the sale goes smoothly. Many people engage the services of a business attorney help to identify and manage issues like non-compete agreements, indemnification clauses or contract provisions that could cause conflicts, while others decide to go it alone. Regardless, a few elements that commonly cause conflict in the sale of a family business should be considered.

Non-Competition Covenants

Many times, a family business involves one active owner while the others participate silently. During a business sale, the buyer will often require the owners to enter into a non-competition agreement that prohibits them from engaging in the business that competes with the one they’re selling. While silent owners may not have difficulties transferring ownership, active owners might disagree with anything that deprives them of activities that over the years became part of their life. They may insist on compensation for the prohibition. Since any payment made to the active owner reduces the amount other owners receive, such a situation could cause conflict among the sellers.

Consulting or Employment Agreement

It’s not unusual for buyers to request the existing manager to remain with the business during a transition period. Disagreements among the owners about the length of the retention agreement and the benefits and compensation demanded by the manager could put family members at odds and jeopardize the sale. Therefore, active managers sometimes need to retain separate legal counsel when a consulting agreement is part of the buyer’s demands.

Indemnification Clause

Often, the buyers will want the sellers to provide buyer representations like ownership of the assets, the lack of environmental or tax issues, or the condition of the building, equipment or other property used in the operation of the business. While active owners typically do not have a problem doing so, inactive owners may be reluctant to provide indemnification when they have limited knowledge of the business. When disputes about indemnification clauses arise, placing some of the proceeds from the sale in escrow, issuing a promissory note, or drafting contribution agreements are sometimes solutions.

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