After completing the due diligence process, a buyer will have enough information to make a final decision upon closing the transaction. The Letter of Intent will have laid out the basic process for closing the purchase or sale of the business, but what exactly is involved in closing the transaction?
As lawyer’s often state, it depends. It depends on what was discovered during the due diligence process. The LOI will have laid out the basics such as the consideration for the purchase(cash, stock, etc.), the date of closing the transaction, and perhaps the people designated to close it and the location the closing will occur.
A quick point here. When I say “Time to Close,” I do not mean the actual time when the parties and their representatives sit down at the table and sign the documents. At that point the deal is done. What I’m talking about here is the time after the due diligence is completed up to that point. This is when the buyer or seller address any concerns that arose during the due diligence process and reduce the terms to writing.
What documents are required will depend upon each individual transaction. Some of the common types of documents used at closing are discussed below.
Purchase/Sale Agreement. This is the document that officially consummates the transaction and contains the meat of the deal. It will include a variety of terms agreed to by the parties. Some common items include representations and warranties, an indemnity clause, a list of assets included, any special terms and the purchase price.
Financing Agreement. If the buyer is not using his or her own money or using a bank loan, a common alternative is seller financing. This agreement is often provides the seller with a security interest in the business’s assets until the buyer repays the financed amount.
Employment Agreement. Sometimes a buyer is purchasing a business in a new industry which he she has little experience with. In these cases, the buyer might find it beneficial to retain the seller as an employee for a period of time. Alternatively, a seller might require an employment agreement for a fixed term as part of the deal. It is not uncommon for the buyer(or seller) to require an employment agreement securing those services as part of the deal.
Change in Ownership Forms for Franchises. If someone buys an already existing franchise, there will likely be special forms required by that franchise to qualify the buyer for ownership. These forms will be completed prior to the closing date to ensure that the buyer is approved by the Franchiser. What forms are required depends upon the franchise involved and each has different requirements for its franchisees.
Change in Operating Agreement. It is not uncommon in a business with multiple owners for one of those owners to sell his share. This share could be sold to an existing owner or to a new owner. Regardless, when a new owner comes into the mix there may need to be changes to the Operating Agreement or whatever document governs that entity.
Secretary of State Forms. With a new owner, certain entities are required to update that information in its business filings with the Secretary of State. The forms involved and the fees required vary by entity type.
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