Navigating the various legal complexities is integral during a business sale. In this review, we discuss the legal aspects and challenges buyers face when they purchase an existing business.
The Different Types of Legal Aspects of Buying a Business
There are many legal aspects of buying a business. It is important to understand the various aspects to ensure the sale goes smoothly without any legal setbacks or disputes. Below we discuss the most common types of legal aspects that are involved in buying a business, which include a range of legal documents and processes.
Business Offers (Non-Binding vs. Binding)
There is also a legal aspect as it pertains to making business offers. Specifically, you will need to make sure that your offer is non-binding, unless you specifically decide that you want the offer to be binding if it is accepted. Here is a closer look at the differences between the two types of offers:
- Non-binding – This means that you are not legally obligated to fulfill the proposed terms of the offer if the offer is accepted. In other words, you can retract the offer at any time with no legal consequence
- Binding – This indicates that the buyer and seller are legally obligated to follow through with the terms of the offer if it is accepted by the seller.
In almost every instance, an initial offer is non-binding, and it is important for you (the potential buyer) to clearly state this in writing when you submit your offer. Additionally, you should ensure the language in your article is how you want it so that there is no ambiguity pertaining to the involved terms. Otherwise, you could risk legal disputes later on if an offer is accepted but both sides interpret the language in the written offer differently.
Non-Disclosure Agreement (NDA)
A non-disclosure agreement, or an NDA, is a legal document that states any parties who sign the document cannot disclose certain information. An NDA is needed during a business sale for several reasons. For instance, the seller may not want their employees, suppliers, and customers to know about the sale until it is complete. Otherwise, business disruptions may occur and impact the ability to sell (and the value of) the company. It is important to read through any NDA before you sign and ensure the terms in the agreement are fair.
Exclusivity Agreement
For buyers, an exclusivity agreement gives you the sole right to purchase the company, and the seller cannot work out a deal with another potential buyer while you are working out a deal. You may have your broker and/or attorney draft an exclusivity agreement if you are close to a deal but need more time to iron out all of the details with the seller. In this case, you can help ensure the seller is not seeking competing offers for better terms while you finalize the details.
Letter of Intent (LOI)
A letter of intent (LOI) states the buyer’s intention to purchase the company for sale. It establishes the terms of the sale (i.e. sale price, payment method, financing, assets included and excluded, etc.) and may provide a closing date. In some cases, the steps involved in due diligence are stated within the LOI document as well. This document is used at the end of negotiations between the buyer and the seller, particularly once they reach a final deal.
Business Purchase Agreement
A business purchase agreement is the final legal document before closing. This document outlines the final terms for the purchase, such as the involved parties, a description of the business, and the financial terms of the agreement. The letter of intent is often used as a template for the purchase agreement, unless changes to the offer are made during the due diligence stage. Unlike the LOI, the purchase agreement is a binding contract. This means both parties are obligated to uphold their end of the bargain after the agreement is signed. The purchase agreement is usually signed at closing.
Contingencies and Warranties Agreement
A contingencies and warranties agreement discusses the contingencies that are in place for the deal. In other words, there are certain actions that must take place for the deal to become valid and final; these actions are outlined in this agreement. Examples of contingencies that may be discussed in the agreement include:
- The buyer is able to receive the financing that is necessary (either through the seller or a financial institution)
- The buyer is satisfied with the findings during due diligence
- The company is able to retain the top customer account (this may be necessary if one customer accounts for a large percentage of the company sales)
Asset Agreement
An asset agreement, also called an asset purchase agreement or APA, is a document that outlines the assets that are exchanged during a business sale. This primarily refers to tangible assets such as raw materials, equipment, office buildings (and other real estate property), furniture, technology equipment, etc. This information may be included in other legal documents such as the letter of intent and purchase agreement, or it may be put into a separate document such as an APA.
Additional Legal Aspects That May Be Included
Additional legal documents and agreements may be necessary to complete the sale. The precise documents that are needed depend on the specifics of the sale agreement. For instance, additional documents may include share agreements, completion documents, due diligence questionnaires, non-compete clauses, etc. It is important to work directly with a business broker and an attorney to ensure all necessary legal aspects of buying a business are properly conducted and fulfilled.
Contact Our Business Brokerage to Discuss The Legal Aspects of Buying a Business
Are you interested in purchasing a business? If so, then contact the business brokerage team here at Sigma Mergers and Acquisitions. We are more than happy to answer your questions and concerns related to the legality of a business purchase, along with assisting you throughout your entire journey.
