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Buying or selling a business? Some documents you might see in the process.
By Attorney Terrence J. Gaffney
You might be thinking of buying—or selling—a business. In the old days, business transfers might have been done “on a handshake.” But you know that seldom occurs any more (as indeed it shouldn’t.) This article will identify, and briefly describe, some of the documents and paperwork you may see during the business sale or purchase process. There may well be others, depending on the deal. Many of these will define and impose important legal rights and responsibilities. Good legal counsel can help you identify potential problem areas before the problems occur, and advise you on how to contract around them.
The listing contract. The owner’s contract with its business broker to market the business. Identifies the business and assets to be sold or not included, the desired price, listing period, the broker’s commission rate (usually higher than a real estate broker’s commission), possibly the marketing strategy.
The Letter of Intent. Sometimes called a “memorandum of understanding,”—an “agreement to agree.” The initial agreement of buyer and seller, identifies the assets being bought, the price, some potential terms of the future contract, provides for confidentiality, and keeps the seller from continuing to “shop” the business.
The Asset Purchase Agreement. The binding contract that contains the specific terms of sale: the assets being sold, the price, closing date, contingencies (financing, permitting, due diligence, etc.), representations, warranties and covenants of seller (to show that the business is worth what the buyer is paying for it), seller financing terms; non-competition and consulting terms, indemnification and other provisions. Sometimes is not actually signed until closing.
Good legal counsel can help you identify potential problem areas before the problems occur, and advise you on how to contract around them.
Buyer’s loan documents. For example:
the buyer’s loan application
SBA disclosure documents (if applicable)
the SBA lender’s loan commitment letter
the promissory note to the lender (a fancy “IOU”)
the mortgage and the security agreement (gives the lender collateral in the business real estate and personal property; must be recorded or filed)
personal guaranties (where the buyer is a corporate or other entity)
a promissory note and mortgage back to the seller and bank lender’s subordination agreement, (if the seller is giving some seller financing)
Title commitment. If the sale includes real estate, a title company will provide a commitment for title insurance, which the seller orders and is a seller charge. This will disclose the seller’s mortgage and other liens and issues that are “of record.”
Survey. Many lenders require a survey of the real property, even if it is a platted lot or part of a certified survey map, to show whether there are encroachments or other issues.
UCC searches. A search of records of the Department of Financial Institutions to show if UCC financing statements (or terminations) are on record that indicate someone has a security interest in any assets.
Bill of Sale. Signed by the seller, and gives the buyer the ownership of seller’s personal property (all equipment, supplies, inventory, furnishings, and other business assets other than real estate and except for any “excluded” property.)
Warranty Deed. Signed by the seller, and gives the buyer title to the real estate. The deed needs to be promptly recorded with the Register of Deeds after the closing.
The Closing Statement. Shows the dollars at closing: purchase price, deductions, credits (such as real estate and personal property tax prorations) and disbursements (broker’s fee, title fee, transfer tax, loan payoffs, etc.) Where there is real estate, a “HUD-1”, or RESPA, closing statement is also provided by the lender or title company.
The 1099. Tax form showing gross proceeds to seller.
Leases. Buyer’s lease with landlord for business premises if the sale does not include real estate; also leases for photocopier, telephone system, or other equipment.
Assignments. Seller will assign its interests in contracts and leases: Yellow Pages advertising, building leases, telephone, copier and other equipment leases, contracts with suppliers.
ERISA and benefit plan documents and “SPD’s”. These contracts and summary plan descriptions describe the pension and profit sharing plans, medical insurance, and other employee benefit plans that the buyer may assume or create.
Licenses. If there is proprietary intellectual property and software, there will be licenses or assignments of licenses for patents, trademarks and tradenames, and computer software. Third-party approvals may be required. Not all software licenses are assignable.
Collective bargaining agreement. While a union contract may not be assignable to a new owner, the owner will bargain with the union and enter into its own agreement.
Non-competition and confidentiality agreement. Preserves the buyer’s goodwill by preventing seller from going into a competing business (usually 2 or 3 years, and in the territory where the business markets its products or conducts business.)
Consulting agreement. Terms of any post-closing assistance the seller’s principal owner will provide to the buyer.
Corporate resolutions. If they are corporations, seller and buyer will bring to the closing minutes and resolutions of their directors and shareholders authorizing the sale (for the seller), and authorizing the purchase and the loan (for the buyer).
Permits and licenses. Include the Wisconsin seller’s permit (sales and use tax collection) and other state or local regulatory permits.
Governmental documents. Unemployment comp. insurance reserve account forms and filings, worker’s compensation insurance, subchapter S election (form 2553), etc.
ACORD forms. Show the limits and type of insurance coverage.
Attorney Opinion letter. Buyer’s lender, buyer, or (rarely) the seller may require an opinion from the other party’s lawyer about the legality of the transaction, the validity and enforceability of the mortgages and security agreements, etc.
Utility deposits. If new service or a new customer, the electric, gas, phone, cable, internet or other utility provider may require an initial deposit when buyer obtains service.
The more complicated the deal, the more documents like these that there will be. Besides being aware that these documents may be there, it is even more critical that the parties know who has responsibility to prepare them, ensure that they are prepared correctly, know what to do with them and know what they mean. In any deal, professional representation by competent lawyers, accountants and business or financial advisors is essential.
