Legal Documents Needed to Sell a Business

Key Takeaways

• A wide range of legal documents are required to successfully sell a business, including financial statements, contracts, and transfer agreements.
• A Confidential Information Memorandum (CIM), employee documentation, and regulatory filings may also be essential depending on the business type.
• Due diligence documents must be prepared in advance to satisfy buyer scrutiny.
• Regulatory approvals and consents (e.g., landlord, licensing boards) can delay or derail a deal if not properly obtained.
• Use an organized “completion checklist” to ensure all paperwork is ready by closing.

Legal documents needed to sell a business might include some or all of the following:

• Non-Disclosure Confidentiality Agreement
• Personal Financial Statement Form for Buyer to Complete
• Offer-to-Purchase Agreement
• Note of Seller Financing
• Financial Statements for Current and Past Two to Three Years
• Statement of Seller's Discretionary Earnings and Cash Flow
• Financial Trends and Ratios
• Accounts Payable and Accounts Receivables Aging Reports
• Inventory List with Values Detailed

The process of selling a business might begin with attempts to attract qualified buyers through ads or word of mouth. It won't get serious attention until you can provide hard-copy versions of accurate facts, figures, and financial statements for the business. Once you've presented these, the selling process can begin.

Six Documents Needed to Sell Your Business

You need six documents when selling your business. Each should be completed within the legal requirements of the state where the business is being sold.

1. A Letter of Intent is a legal document that lists the conditions, terms of the transaction, due diligence terms, deposit amount, and any additional, relevant terms of the agreement. In some cases, buyers will submit their own Letter of Intent for seller approval.
2. Buyer's Due Diligence is listed in the Letter of Intent. Due diligence indicates the buyer will do their own research to verify all aspects of the business. This includes examining financial records, customer records, sales reports, profit and loss statements, expense reports, and the like. This review will help the buyer confirm they want to buy the business.
3. A Purchase Agreement is the next step after the Letter of Intent has been signed and due diligence has been completed. The purchase agreement is a legally binding contract that locks in the buyer to the price and other agreed-upon terms.
4. The Buyer's Method of Payment must be determined to move forward. Cash payments are preferred, as they are the easiest to finalize. In some cases, financing will be used and the seller will receive payments over time. Avoid this, if possible, to remove the risk of the buyer defaulting on the loan.
5. Pay attention to local and state laws that are in place to regulate the sale of the business in each state. It is important to understand this information to avoid breaking any laws. This can result in fines or a delay in the sale of the business.
6. Transfer of Ownership is completed when all legal contracts and paperwork are signed.

Additional Legal and Supporting Documents

Beyond the six essential documents listed, there are several other documents needed to sell a business, depending on the business’s structure, industry, and the complexity of the transaction:

• Confidential Information Memorandum (CIM): A CIM is a comprehensive marketing document often prepared by a business broker or M&A advisor. It outlines the company’s history, operations, financials, customer base, and growth opportunities.
• Non-Compete Agreements: These agreements restrict the seller from starting a competing business in the same market for a specific time period after the sale.
• Employment Agreements: If key employees will remain with the company post-sale, formal employment or retention agreements should be in place.
• Escrow Agreements: In deals where part of the purchase price is held temporarily post-closing, escrow terms must be defined in writing.
• Corporate Resolution to Sell: A formal resolution by the board or shareholders authorizing the sale, especially for corporations.
• Bill of Sale: This document certifies the transfer of ownership of specific business assets to the buyer.
• Tax Clearance Certificates: Some states require the seller to provide proof that all taxes have been paid before the business can legally change hands.
• UCC-1 Financing Statements: If the buyer is using secured financing, a Uniform Commercial Code (UCC) filing may be required to declare collateral.
• Franchise Transfer Documents: If the business is part of a franchise, consent from the franchisor and updated franchise agreements may be needed.

Buying Assets

When buying a business, you must review what assets you will purchase. This might include machinery, stock, customer contracts, and intellectual property. Your decision will be listed in the Asset Purchase Agreement. Make considerations and inventories for each item. Some examples include:

• Stock: List each stock with its current value, then review at the time of purchase to make any necessary adjustments.
• Creditors/Debtors: List all credits and debts. Any debt typically remains with the seller for repayment until the completion date.
• Employees: When the business is sold as a "going concern," the employees will be transferred automatically. Both buyer and seller should request advice to determine the financial consequences.
• Landlord Consents: If the business is housed within a leased facility, you will need the landlord's consent, at your expense, to transfer or assign the lease.
• Plant and Machinery: List all plants and machinery, along with purchase dates and purchase or lease agreements.
• Goodwill: This represents the value added over the book value related to the brand and total customer base.
• Share Purchase Agreement: If the business being purchased is structured as shares, you will need a share purchase agreement. This document will be the main negotiation and will lay out the terms of the company shares, assets, and liabilities.
• Contracts: Identify and review all contracts and agreements found during the due diligence process. Add any clauses needed to protect against potential liabilities.

After reviewing all assets, complete a completion agenda. This will help track any registrations, taxes, insurance payments, and similar requirements needed to finalize the sale of the business. The buyer should request a tax indemnity to act as protection from unknown tax liabilities the business has incurred prior to completion of the sale.

Completion Checklist

To finalize the sale efficiently, it’s essential to prepare a closing checklist. This ensures that nothing critical is missed during closing:

• All agreements are signed and dated
• Purchase funds are transferred
• Asset titles and deeds are reassigned
• Intellectual property (trademarks, patents, domains) is legally transferred
• Vendor, customer, and employee communications are drafted
• Tax liabilities and prorations are settled
• All representations and warranties are reviewed and agreed upon

This checklist can be managed by a transaction attorney or M&A advisor to help maintain momentum and avoid legal missteps.

Regulatory Filings and Approvals

Several regulatory and legal filings may be required to ensure a lawful and smooth transfer:

• State and Local Business Licenses: Ensure all licenses are transferred or reissued under the buyer’s name.
• Zoning and Use Permits: If the business operates from a commercial location, confirm that zoning permits will not be affected by new ownership.
• Environmental Compliance Reports: For businesses dealing in manufacturing, chemicals, or waste, environmental assessments may be necessary.
• Landlord and Lienholder Consents: In addition to lease transfers, any assets under lien may require consent from secured parties before transfer.
• FTC or Antitrust Compliance: For larger deals, sellers and buyers may need to file under the Hart-Scott-Rodino Act if thresholds are met.

Frequently Asked Questions

1. What are the most important documents needed to sell a business?
   The most essential documents include the purchase agreement, financial statements, Letter of Intent (LOI), bill of sale, and ownership transfer paperwork.
2. Is a Confidential Information Memorandum always required?
   Not always, but a CIM is highly recommended for attracting qualified buyers and summarizing the business's value proposition and operations.
3. What financial statements should be shared with the buyer?
   Typically, profit and loss statements, balance sheets, tax returns, and cash flow statements for the last 2–3 years are shared.
4. Do I need a lawyer to sell my business?
   While not legally required, hiring an attorney is highly advisable to prepare documents, comply with state laws, and avoid legal disputes.
5. What happens if I don’t transfer all licenses or permits?
   Failing to transfer business licenses or permits could delay the closing or invalidate the sale, leaving both parties legally exposed.

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