Legal Documents Needed to Sell a Business
The process of selling a business might begin with attempts to attract qualified buyers through ads or word of mouth.3 min read updated on February 01, 2023
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.
- 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.
- 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.
- 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.
- 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.
- 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.
- Transfer of Ownership is completed when all legal contracts and paperwork are signed.
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.
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