Business Purchase Closing

What exactly is involved in a business purchase closing?

This is where all of your hard work comes together. You and your attorney put all of your preliminary agreements with the seller on paper in a legal format and prepare to sit down at the closing table.

The above is the simple version. And it can be that simple, but often it isn't. There are ways for you to ensure that this is the case. By knowing what is involved, I hope I can make sitting down and signing a few pieces of paper a reality for you.

Before you go forward and read the information below on the business purchase closing for buying a business, it's important that you have already prepared yourself to buy, find and value a business. To make sure you are ready for the information on this page, please look at the Preparation, Finding a Business, Business Valuations, Letter of Intent and Due Diligence pages first.

Business Purchase Closing- How Does It All Start?

The business purchase closing phase starts once you reach the end of the due diligence process. This is the key point in time when you must decide to move on with the purchase or cut off the process immediately and let the seller get back to showing it to other potential buyers.

Once you have committed to the seller to move forward with the purchase, it's time to get your attorney involved full force. What also happens at this point is that you will need to put up a true down payment that will not be refundable unless the seller decides to back out of the deal.

Normally this number has already been specified on the LOI and can be anywhere from 5% to 20% of the full purchase price. If the seller is holding the note for you, the percentage will be on the lower end.

Business Purchase Closing- Purchase Agreement

The business purchase agreement, in most cases, should be a pretty standard document that reflects all of the issues that you and the seller have worked out as part of the deal. The LOI will have a majority of this information already spelled out for your attorney to get started on.

It's up to you and the seller (often with the help of a broker) to keep the attorneys in check with regards to this document. Basically, your attorney should be drafting an agreement that puts the issues already discussed with the seller into a legal format while adding in normal protection. He/she should be discussing this with you at all times.

Do not forget that the lawyer you hired works for you. Not the other way around. They often like to show off their brain power by adding in unnecessary things into the agreement and otherwise dragging things out.

Do not let this happen. They need to bring any potential issues to your attention with you making the decision on if it is important after hearing an explanation.

This draft will go back and forth between lawyers (hopefully only a few times) until it is complete. It's then ready to bring to the closing table. Often though, there are more documents to go along with the purchase agreement.

Business Purchase Closing- Liens, Filings and Taxes

There is one aspect of the sale that is somewhat beyond the attorney's control so you must get them on it as soon as possible.

A lien search along with certain filings and tax transfers must be completed. These are slightly different in each state and industry and will be completed based on the timeline set by whatever state(s) you need to file with.

Also, liens may need to be set up against the purchased assets so that the lender you are using or the seller (if holding a note) can take back the assets if you default.

Depending on the type of business, your attorney will need to file with the state to verify that any of the company assets you are buying are free and clear of any past tax burdens. If they are not, depending on what has already been agreed upon, the buyer will have the options to back out of the deal or get the seller to clear up the problem to go forward.

Some states require other checks and filings to be performed by the attorney. Again, depending on the state, these can take a few days or a few weeks.

In some cases, in order to finalize a business purchase closing, certain transfer taxes/bulk sales taxes must be paid buy the buyer at closing. Your attorney should be responsible for determining these fees also.

Business Purchase Closing- Leases and Property Purchases

Setting up a lease can sometimes be more difficult that buying property with the business. The main reason is that it brings another party (and their attorney) to the table to possibly throw in a monkey wrench.

In regards to leases, either you and the seller will be singing an assignment document to have you take over the lease as it currently is, or the landlord will agree to make a new lease. No matter what, make sure your attorney is on top of this. There is nothing worse than a landlord holding up a deal.

Sometimes this assignment or new lease will cost you a little but often times it comes with no charge. If you are charged, they will tell you upfront what the costs will probably be and what they are for. Normally it would involve either office time or attorney fees to be reimbursed to the landlord.

If you are buying the property as part of the deal, things actually become easier.  The purchase price of the building is often allocated inside of the full agreed upon price and will involve the normal closing costs for any real estate purchase such as a title search, etc.

Business Purchase Closing- Non-Compete & Cooperation

It's standard practice to set up a very short but important agreement between you and the seller. The last thing you want is for this person/people to turn around and become a competitor.

Your attorney will have a standard non-compete available that they should go over with you to modify into a document that you are comfortable with and also will uphold in the courts of your state.

Normally it would prevent the seller from being an owner, partner, consultant, investor or even an employee in something considered competition.

Of course there are limits to what you can stop them from doing. Normally there is a geographic component (i.e. not within a 50 mile radius of the business) and a time component (i.e. after 2 years from the purchase) to keep them from causing you harm.

The Cooperation Agreement is a very basic document that keep things moving along in the event that something happens after all of the other paperwork is assigned.

Sometimes all of the research in the world does not reveal a bill that got buried or arose on the day of the closing. Other times things such as warranties or returns are an issue and are the seller's responsibility is the revenue from those sales were not transferred to the buyer.

This agreement will make sure that when something like this is found, that the seller will be responsible and take care of it in a timely manner.

Business Purchase Closing- Notes and Loans

Whenever a loan is involved with a business purchase closing (and there should be since using all of your own cash is not a good idea), you will need to fill out some sort of paperwork.

The simplest will be if you took out a line of credit on your house, since that money will already be available to you. The next easiest will be an agreement with the seller to hold a note. This will also be the most negotiable.

Any commercial lender will require you to assign personal assets and personal guarantees to the loans, which often is the source of the bulky paperwork.

With a seller though, you can be much more flexible and negotiate a number of positive points to help you out. This is also the only time you may be able to get away with not personally guaranteeing a loan with personal assets. But don't count on it.

Business Purchase Closing- Purchase Price Allocations

Both you and the seller will be very conscientious of how the purchased assets of the business are allocated. The seller for tax purposes and the buyer for being able to properly allocate monies for expenses and depreciation.

Most certainly get your accountant to do this for you. In most cases, you and the seller are not in the position nor have the professional knowledge to place these allocations inside of the purchase agreement. You want this done right so get the help.

Business Purchase Closing- How Does It All End?

When all of the paperwork is on place, you and the buyer, along with the buyer/seller attorneys and most likely the broker, will sit down at the closing table to verify everything one last time and sign all of the documents.

If there is inventory involved, you and the seller will actually count and put a number to this inventory on the day of the closing and it gets added into the paperwork as previously agreed.

Once everything gets signed, checks are exchanged to all parties and you are given the keys to your newly bought business. Congratulations!

Business Purchase Closing- What Next?

Well I guess it really does end here with the business purchase closing. It is now truly the beginning of a new adventure.

Hopefully you have made a business plan and are ready to start applying it. I also hope you lined up a variety of help including paid professional help such as a business advisor to make sure you achieve your business goals.

Best of luck!!!