Business Brokers Blog: Guide to Buying or Selling a Business

Legal Documents for Selling a Business

When you are selling a business, it is important that you have legal agreements in place that are easily understood by all parties involved in the transaction.  This will eliminate or reduce potential disagreements after the sale is complete.  There are several documents that are common in many business sale transactions.

The Purchase Agreement

The Asset Purchase Agreement is used when a buyer purchases the tangible and intangible assets of a company versus the stock. This type of transaction is most common in small business deals.  This document typically outlines a description of the assets being sold along with the price, terms, and methods of payment for the exchange.  It is also important to include the allocation of the asset classes since it is a requirement to file this information with the IRS when taxes are paid.  A Stock Purchase Agreement is used when selling the stock versus the assets.  The Purchase Agreement also typically includes the representations and warranties for both the buyer and the seller.  Often a Bill of Sale is included as part of the Purchase Agreement.

Non-Compete Agreement

A Non-Compete Agreement prevents a seller from competing with the buyer after the sale.  There are three main components of a non-compete: 1) what will the seller be prohibited to do, 2) for how long will he be prohibited and 3) in what geography?  This is insurance for a buyer that the business owner can’t sell the company and open a competing business down the street, stealing customers and destroying the value that was just purchased.  A financial value may be applied to the non-compete.

Employment Agreement

An Employment Agreement is often used when selling a business as a way to retain the owner or other key employees after the transaction.  Job expectations and compensation will likely be outlined in the agreement.

Consulting Agreement

The buyer may want to hire the seller on a consulting basis to learn the business.  This may also help to retain current customers and suppliers.  Compensation and expectations will likely be outlined in the agreement.

Lease or Real Estate Purchase Agreement

Many small companies have the business assets and real estate assets separated into different entities for tax and legal reasons.  If a business owner is selling the real estate at the same time as the business, there will likely be a separate agreement for this sale and purchase.  However in some transactions, the seller of the business retains the real estate and leases it to the buyer.  A lease contract would need to be drafted for this type of arrangement.  If the business seller was leasing the real estate from a third-party other than an entity associated with him, the buyer will likely either need to establish a new lease with the landlord or have the existing lease transferred if it is stipulated as an option in the contract.

There are a lot of legal issues that need to be considered when selling a business.  Hiring a competent attorney that is familiar with small business transactions will help protect you and allow you to concentrate on running your new company or moving on to your next life endeavor with peace of mind.