When buying a business, there are several basic steps that you need to take and these should be made in the order listed.
photo credit: Andres Rueda
Letter of Intent
The first step in a purchase transaction should be a “letter of intent.” The is a non-binding document that outlines the proposed terms of the deal including whether it ia an asset or stock purchase; the offering price and the payment terms and any other items that the parties want included.
Confidentiality Agreement
The second step involves signing a confidentiality agreement which is a legally binding agreement where the seller discloses all relevant information to the buyer. The buyer is restrained from further disclosing
the information or using it for his(her) own benefit or purposes. The confidentiality agreement represents the beginning of “due diligence” which is the process where the buyer seeks and gets information from the seller to be able to evaluate the deal.
Purchase Agreement
Step three involves the purchase agreement or the detailed description of the transaction. The purchase agreement is a legally enforceable document outlining among other provisions, the purchase price and terms of payment; the representations and warranties of the seller; and the covenants of the seller.
Generally, the transaction is structured as the purchase of the assets of the business plus some sum in excess of the asset value which represents the “good will” or “operating value” of items like customer lists, etc. The seller may also receive a consulting agreement or “attractive” lease payments as part of the deal.
Closing
The final step is the closing which occurs when the documents of transfer are signed and money is transferred. Documents of transfer generally include the bills of sale, assignments of contracts, transfers of franchise, and deeds.