This is Part 3 of our “How To Buy A Small Business” Series. You can read the rest of the Series HERE.
Once you have made an offer to purchase a business and it has been accepted, and once you and your team have completed your reviews of the business, it is time to finalize the sale of the business. There will always be a collection of documents to be finalized and usually also conditions to be met for the purchaser’s interest and sometimes also the seller’s interest.
There will be numerous documents needed to ensure that the business is accurately transferred. The most important documents are the following:
Purchase Agreement: The most important document necessary for finalizing the purchase will be a “Purchase Agreement”. This will set out all the terms in the Letter of Offer, as well as any renegotiated points which came up during the review process. In additional to all of the financial terms of the purchase, there are several important pieces in this document. A series of “representations and warranties” is an important part of the Purchase Agreement: these reps and warranties essentially create a snapshot of the business for the purchaser. You are agreeing to purchase the business on the particular financial terms, given this particular snapshot. For example, that the business has no debts which haven’t been disclosed, that there are now law suits filed, that the assets of the business are as they have been presented. If any of these points are not actually true, the Purchase Agreement will provide for a financial remedy. The Purchase Agreement will also include all the conditions to finalize the agreement, “indemnifications” for both the purchaser and the seller and various other terms which the lawyers will care a great deal about!
Financing Documents: Most business purchases include some sort of financing. It may be financing from an institution (bank, BDC etc.) or from the seller (i.e. part of the purchase price is paid over time). In either case, there will be documentation of the amount being borrowed, repayment terms and security to protect the repayment of the loan. If the seller provides financing, it provides some protection to the purchaser to ensure that the business is what was represented and to protect the non-competition agreement discussed below.
Non-Competition etc.: In most business purchases a period of “non-competition” will be negotiated with the selling business owners. This helps ensure that the selling business owner cannot set up a similar business within a certain area, for a certain time period, and effectively reduce the value of the business to the buyer. Included with the non-competition commitment will be restrictions on soliciting business from former customers and clients and also employees, if relevant. This agreement can be key to protecting the value of the business which has just been purchased.
The conditions which need to be met in order for the purchase to be finalized will be set out in the Purchase Agreement. The conditions will depend upon the particular business, but can include the following common conditions.
Financing: The approval of and completion of the documentation relating to financing by an institution is often the final timing piece for the transaction. Most banks will take several weeks to approve the financing and complete the paperwork and may require additional information about the business being purchased, such as new financial statements or an updated business valuation.
Lease: If the business is located in a leased property, the landlord will need to approve an assignment of the Lease or may want to have you enter in a new lease. This process will usually take a few weeks and can take longer, particularly with large leasing corporations.
Discharge of Debts: Unless you are willing to take over any existing debts of the business, they will need to be paid off before, or at the closing. Often the seller will negotiate to have part of the purchase funds pay off existing debts. This should be done through one of the lawyers (purchaser or seller’s) to ensure that the debts are paid off.
Employees: A key decision in the purchase process will have been to decide whether any staff of the business will stay employed after the purchase. If there are staff who you do not want to keep employed, then the seller should end employment before the sale closes. If you will be keeping staff members employed then the staff should almost certainly be put on new employment agreements before the sale is closed.
3rd Party Approvals: There can be various approvals from third parties which might be required to finalize the purchase. For example, if you are taking over equipment leases, approval will usually be required. Business contracts being transferred may need approval as well. Approvals can take time and should be prioritized early.
Licenses: The business may have licenses which need to be transferred, or you may need to apply for a new license. Examples of this could include liquor licenses for restaurants, equipment licenses or professional licenses. In most cases, licenses which involve government approvals will take weeks, or longer, for approval.
HOW MOMENTUM CAN HELP: Get in touch today to receive a FREE CONSULTATION on your purchase. Our experienced team can help you navigate the entire business purchase process from start to finish. We offer flat rates for a small business purchase, which allows you to budget this cost with no surprises. We provide business transition advice and help connect you with supporting services to start your new business with confidence. We can help you complete the legal paperwork, assess whether conditions have been met, negotiate any last minute issues and close the transaction smoothly.