ESSENTIAL AGREEMENTS WHEN SELLING OR BUYING A BUSINESS

Introduction:

Completing a successful business sale in the lower middle market requires careful attention to detail and proper documentation. In this blog article, we will highlight the crucial agreements and contracts that need to be completed during the process. While the specific requirements may vary depending on the nature of the transaction, industry, and local regulations, the following list provides a general overview of the essential documents involved in a lower middle market business sale.

1. Letter of Intent (LOI):

The LOI serves as a preliminary agreement between the buyer and the seller, outlining the key terms and conditions of the transaction. It establishes the basis for further negotiations and signifies the buyer's serious interest in acquiring the business.

2. Confidentiality Agreement:

Before disclosing sensitive information about the business, both parties typically sign a confidentiality agreement or non-disclosure agreement (NDA). This agreement ensures that the buyer will maintain the confidentiality of any proprietary information shared during the due diligence process.

3. Purchase Agreement:

The purchase agreement is the primary document that governs the terms and conditions of the sale. It includes details such as the purchase price, payment terms, representations and warranties, closing conditions, and any seller financing arrangements. The purchase agreement is a comprehensive document that requires the involvement of legal professionals.

4. Due Diligence Checklist:

The buyer conducts due diligence to assess the business's financial, legal, and operational aspects. A due diligence checklist outlines the documents and information that need to be reviewed, including financial statements, tax records, contracts, licenses, permits, and customer/supplier agreements.

5. Employment Agreements:

If existing employees are expected to continue working with the new owner post-sale, employment agreements or offer letters may be required. These documents outline the terms of employment, including job responsibilities, compensation, benefits, and non-compete or non-solicitation clauses.

6. Non-Compete Agreement:

To protect the buyer's interests, a non-compete agreement may be necessary, especially if the seller intends to start a competing business in the same industry or geographic area. This agreement restricts the seller from engaging in similar business activities for a specified period.

7. Assignment and Assumption Agreement:

This agreement transfers the ownership of assets, contracts, leases, licenses, permits, and other business-related agreements from the seller to the buyer. It ensures a smooth transition of the business and protects the buyer from any claims or liabilities arising from the seller's actions.

8. Lease Agreement:

If the business operates from a leased premises, a lease agreement is essential. It details the terms and conditions of the lease, including the rent, lease duration, renewal options, and any necessary landlord consents for the transfer of the lease to the buyer.

9. Bill of Sale:

The bill of sale is a legal document that confirms the transfer of ownership of tangible assets, such as inventory, equipment, machinery, furniture, and fixtures, from the seller to the buyer. It provides a clear record of the assets being transferred and protects the buyer's ownership rights.

10. Closing Documents:

During the closing process, various additional documents may be required, such as certificates of good standing, resolutions or consents from the seller's board of directors or shareholders, and any necessary regulatory approvals. These documents are necessary to finalize the transaction and ensure compliance with legal and regulatory requirements.

Conclusion:

Completing a lower middle market business sale involves navigating through a series of agreements and contracts to protect the interests of both the buyer and the seller. While this article provides a comprehensive list of essential documents, it is important to consult legal and financial professionals experienced in business transactions to ensure compliance with local regulations and to address any specific requirements related to your unique situation.