Duty of Care When Selling a Business in the United States

Enterprise owners usually sell their business for one of three reasons. First, it has been their goal from the beginning to set up a business and s...

  • Duty of Care When Selling a Business in the United States
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    Duty of Care When Selling a Business in the United States

    • Monday 18th of August 2014
    • Selling

    Enterprise owners usually sell their business for one of three reasons. First, it has been their goal from the beginning to set up a business and sell it eventually, and the opportune time has come to sell and benefit financially.

    Second, the venture has not been making any remarkable progress since its inception, and it would be best to sell and explore other enterprise opportunities rather than retain and continue the business.

    Third, it is time to leave the business industry and enjoy retirement with the profits acquired, or it can also be due to ill health. The basic principles behind successfully buying or selling a business are consistent across a range of sectors; however, the legal requirements involved and the procedures to be followed may vary depending on the country.

    Sellers should review all legalities in the country where they intend to sell their business, as well as ensure that all activities to be undertaken are ethical. One of the main considerations enterprise owners should safeguard, when selling their business, is duty of care.

    Understanding Duty of Care

    The term “duty of care” refers to a person’s or a company’s responsibility when transacting or dealing with other people or groups. This also means that a person or a company should think reasonably and responsibly before engaging in activities with others, making sure that the other party will not experience unreasonable loss or harm from engaging in such activities.

    More specifically, it is the legal responsibility or obligation of an individual or a company not to omit any information, procedure or activity that will likely cause harm (i.e., tangible and intangible damages) to other individuals or groups.

    In tort law, which refers to law that offers solutions to a party harmed by another party’s unreasonable actions, anyone who infringes the duty of care due to reckless, wanton or negligent actions is held accountable for any form of harm incurred by someone else caused by the former’s inability to be reasonably careful.

    According to McCarthy & Cambron-McCabe (1992), claims under such law commonly include state law and are based on the legal premise that people are liable for the outcome of their actions if they harm or injure others. The duty of care between two parties (e.g., two individuals or two companies) depends on their situation or connection.

    Duty of Care in the United States

    In business and corporation law in the United States, ‘Duty of Care’ is included in the fiduciary duty that a board of directors owes its corporation. Examples of this include the Revised Model Business Corporation Act and the Delaware law. A director’s duty of good faith and Duty of Loyalty are also under fiduciary duty. This means that a director has a duty to carry out good and proper business judgment, as well as to ensure that the business is operated with reasonable care.

    In selling a business in the United States, directors or company owners should act in good faith and for what is best for the business. At the same time, they should make sure that the selling of the business will not cause any harm to people and groups in the United States.

    Advice for Foreigners Selling a Business in the United States

    After careful decision making, foreign enterprise owners who decide to sell a business in the United States should thoroughly review the country’s business laws and regulations. The first step in selling a business properly and legally is to prepare a sales agreement, which is the primary document or requirement in purchasing the stocks or business assets of a company. The sales agreement should be drafted accurately and covers all the inclusions and exclusions of the sale. Many experts would recommend having such document reviewed by an attorney before the concerned parties participate in the transaction. A sample sales agreement can be found online at the Internet Legal Research Group. More forms for buying and selling a business can be found here.

    The United States Small Business Administration (SBA) offers the following checklist of items that should be addressed in the agreement to sell a business:

    • Names of the seller, the buyer and the business
    • Background information
    • Assets being sold
    • Purchase price and Allocation of Assets
    • Covenant Not to Compete
    • Any adjustments to be made
    • The Terms of the Agreement and the terms of payment
    • List of inventory included in the sale
    • Any representation and warranties of the seller and the buyer
    • Determination as to the access to any business information
    • Determination as to the running of the business prior to closing
    • Contingencies
    • Fees, including brokers’ fees
    • Date of closing

    Below are links from the SBA website that offer more resources on business law and regulations in the United States:

    • Industry Laws and Regulations – This section features articles on environmental regulations, finance law, online business law and advertising law.

    • Employment Labor Law – This section has links to employment laws assistance for workers and small businesses; laws, regulations, and technical assistance services; compliance assistance services; compliance assistance materials for new and small businesses; and a summary of the major laws of the Department of Labor.

    • Handling Legal Concerns – This section features information on how consumers can get legal help online; lawyers who are prepared and available to help; state bar associations; fees and expenses as well as fee negotiations and arrangements; arbitration; contracts; frequently asked questions about seeking the services of a lawyer; and legal questions and answers from the Score organization.

    • Understanding Fair Practice – This section provides a brief yet clear explanation of antitrust laws, which are designed to tackle issues such as conspiring to fix market prices, price discrimination, conspiring to boycott, conspiring to allocate markets or customers, and monopolizing the industry.

    Enterprise owners who plan to sell their business in the United States should practice duty of care throughout the entire process. This also includes having a contingency plan in case unforeseen undesirable circumstances arise during the transaction or after the sale. In instances wherein conditions appear ambiguous, it would be best to seek legal advice and to be transparent with the buyer at all times.