What Documents and Information are Required When Selling a Business?

The question often arises as to what are the typical documents and information required when selling a a business.  This article seeks to provide a basic overview. You should ensure that each stage of the negotiation to sell your business is documented in order to include all agreements and conditions in the final definitive agreements.

Letter of Intent

Once you have a general agreement in principal between a buyer and seller as to the price and terms of the sale, the buyer usually drafts and signs a non-binding letter of intent. The letter of intent lays out the general terms of the deal, and, if signed by the seller, it indicates that both parties intend to move forward in completing the transaction.

Generally, at the time the buyer submits the letter he or she will also make a monetary deposit on the purchase price, similar to the earnest money used in a real estate deal. If the deposit is large, the seller may agree to a “no-shop” agreement, which prevents the seller from further marketing the company. However, the letter of intent  is usually nonbinding in the sense that at any point, negotiations can be broken off by either party, and the buyer’s deposit will be returned. Once signed and accepted by the seller, the Letter can be shown to third parties such as lenders and stockholders as evidence of the seriousness of the parties.

Due Diligence

Usually, after a buyer signs a letter of intent to purchase a business and the seller accepts the letter, the buyer will have a specified period of time in which to conduct a due diligence investigation of the seller and the company. During this period, your buyer should have access to your financial and other records, facilities, employees, etc., to investigate before finalizing the deal. Among the most typical documents to be reviewed by the prospective buyer as part of the Due Diligence process are the following:

  • Non-disclosure Agreement – this is requested by the seller prior to turning over anything confidential information to the prospective buyer
  • Buyer’s personal financial statement or bank loan commitment letter
  • Three years of internally generated business Profit & Loss Statements
  • Current Balance Sheet
  • Three years of business tax returns
  • A copy of current lease (with any amendments)
  • Copies of insurance policies
  • Any professional licenses or certificates
  • Vendor/supplier contracts
  • Client/customer contracts
  • Employment Agreements/Independent Contractor Agreements

Definitive Agreements

When buyer and seller are satisfied with their initial checks, and an initial offer has been made and accepted, the next step is to prepare definitive agreements embodying the terms and conditions are are drafted by the buyer’s or seller’s attorney. The documentation typically includes:

  • the Stock Purchase Agreement or Asset Purchase Agreement
  • minutes of the board meeting authorizing the transfer of ownership and resignation of directors
  • transfer documents for licences, leases, client contracts, shares, etc
  • consulting agreements (for the seller and other key employees remaining on after the closing in an advisory role
  • Generally, the buyer will not simply pay cash for the business. Outside bank or seller financing will need to be arranged and loans and notes drawn up.
  • security provided for selling party (including personal guarantees, stock pledges and Security Agreements)
  • warranties, for example guaranteeing the accuracy of the seller’s statements on all key information
  • Seller’s Covenant Not to Compete

Once both parties have agreed on the language of the definitive agreements, it will be signed by both parties. The agreements will state the closing date at which the final transfer of ownership and possession of the business will occur, and when the seller will get paid. With a signed purchase agreement in hand, the buyer can finalize any financing arrangements with outside lenders in anticipation of the closing.

Should you desire more information on this topic, please give us a call at 949-453-7979 or click here to request a call.