Buying a Business – Part 2: Closing

This is Part 2 of a 2-part series on what you can expect when you buy a business and focuses on the closing of the transaction.

The two most important things a Buyer can do to minimize issues after buying a business are to perform adequate due diligence before becoming obligated to purchase the business and to document the transaction with properly drafted legal documents.  The Buyer needs to anticipate potential post-closing problems and include provisions in the closing documents which will resolve these problems if they arise.

The following is a brief summary of the documents which are usually included in the sale and purchase of a business.  There may be other documents depending on your specific transaction.

Purchase/Sale Agreement.  This document officially consummates the transaction and states all material terms and conditions of the transaction.  Common items include the purchase price, a list of assets included in the transaction, representations and warranties and an indemnity clause.  Other provisions that may be included, either in the document itself or in separate agreements, include:

• Proration Agreement.  Certain costs, such as business personal property taxes, rent, license fees or other items relevant to the transaction, are prorated between the Seller and the Buyer for the month or the year.
• Work in Progress (WIP).  The Buyer and Seller specify who will handle completion of existing projects and how any customer issues that arise after the closing or warranty issues attributable to work performed by the Seller will be handled.  They also need to articulate how any expenses incurred will be handled and how the revenue from WIP will be distributed.
• Training and Transition Agreement.  Usually the Seller provides training and assists the Buyer during a transition period while the Buyer is learning the business operations.
• Consulting/Employment Agreement.  Sometimes the Buyer might find it beneficial to retain the Seller as a consultant or an employee for a period of time following the closing.  Alternatively, the Seller might require an employment agreement for a fixed term as part of the deal.
• Non-Compete Agreement. T he Seller promises not to compete with the business being sold for a period of time within a defined territory.
• Allocation of Purchase Price.  In an Asset Sale, the Buyer and Seller must agree on the allocation of the purchase price among the various assets the Buyer is purchasing for tax purposes.

Bill of Sale.  The Bill of Sale evidences the transfer of personal property from the Seller to the Buyer.  Frequently it includes an assumption of existing contracts.

Assumed Name Certificates.  If the business is operated under an assumed name, the Seller will abandon the assumed name and the Buyer will file an assumed name.  Usually these filings are made with the Secretary of State and the County Clerk where the principal place of business is located.

Promissory Note.  Buyers frequently require financing from a bank or the Seller.  In many cases, the Promissory Note provides the lender with a security interest in the business’s assets until the Buyer repays the borrowed amount. The bank or the Seller may also require a personal guaranty from the Buyer to repay the loan amount.

• Security Agreement.  This document creates a lien on personal property to secure payment of the Promissory Note.
• UCC-1.  Typically, the lender will file a UCC-1 Financing Agreement with the Secretary of State to provide notice that the lender has an interest in the personal property of the business.

Assignment of Lease or New Lease.  If the Seller operates the business in a leased space and the Buyer intends to continue using that space, the Buyer must either obtain the landlord’s consent to an assignment of the lease or enter into a new lease.  The Assignment of Lease transfers the Seller’s interest as a tenant to the Buyer.

Resolutions Authorizing the Transaction.  Whenever the Seller or the Buyer is an entity, the entity must provide resolutions from the entity’s members (if it is an LLC) or board of directors and shareholders (if it is a corporation) that authorize the entity to enter into the transaction and related agreements.

Officer Certificate or Affidavit.  The officer of an entity certifies that the representations and warranties made in the Purchase Agreement continue to be true as of the closing and that the entity has performed or complied with its obligations pursuant to the Purchase Agreement.  Similarly, in the case of a sole proprietorship, the owner provides an affidavit affirming the representations and warranties in the Purchase Agreement are true.

Change in Ownership Forms for Franchises.  If the Buyer is purchasing an existing franchise, the franchisor usually requires certain forms and documents be completed as part of the transaction.  In most cases, these forms and documents must be completed prior to the closing to ensure that the Buyer is approved as a franchisee.

Change in Operating Agreement.  In the event one or more owners in a limited liability company sell their ownership interests, there may need to be changes to the company’s Operating Agreement.

Secretary of State Filings.  Depending on the transaction, certain entities are required to update their business filings with the Secretary of State.  The forms involved and the fees required vary depending on the entity and the transaction.

Buying a business is a complex transaction. For more information, please contact Kathy Tremmel at Tremmel Law, PLLC at (512) 539-0317 or kathy@tremmellaw.com.

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