What are the Key Documents Associated with the Purchase of a Business?
The purchase and sale of a business can be conducted by either a purchase of assets or by buying the stock or membership units of the target business. For any purchase transaction, there are a number of key legal documents that must be drafted for the transaction. We have summarized the documents below.
Term Sheet. This is a summary document where the parties define the high level terms (eg. price payment terms, due diligence, etc.) and reach agreement in principle on the key terms of the acquisition before beginning the process. This is usually done before due diligence is started so that the parties can get a good sense of whether the transaction will ever occur. Although some parties ask for the term sheet to be signed, they are usually not legally binding documents but are more similar to an expression of intent to negotiate. If there are binding provisions in the term sheet, they should be clearly defined and agreed to by the parties.
Confidentiality and/or Non-Disclosure Agreement. When a sale of assets or a business takes place, the sale usually involves the purchaser having access to a significant amount of confidential and financial information about the seller and the seller’s business. As such, most sellers require that the buyer sign a confidentiality agreement prior to making any information available to the buyer. If the buyer breaches this agreement and discloses the seller’s confidential information, they can be subject to damages. The confidentiality agreement is similar to a non-disclosure agreement (NDA) and is meant to protect the seller.
Exclusivity Agreement. A prospective purchase is time and resource intensive. As such, a seller may ask a buyer to focus on the transaction and also require that the seller agree not to negotiate with other parties for a given period of time. A seller may require this so that they are sure they are not wasting their time.
Purchase and Sale Agreement
The purchase and sale agreement is the key legal document that summarize the rights and obligations of the parties related to the sale of assets or equity. You can read more about the typical provisions in a purchase sale agreement by clicking here.
Business Entity Documents
Any purchase or sale involves the development and/or review of business entity documents. These documents include:
- Certificate of Organization or Articles of Incorporation
- Operating or Shareholder Agreement
These documents will exist for the selling company and will be modified or amended if the purchase/sale is an equity transaction. If the purchase/sale is a purchase sale of the assets, new documents must be created for the new entity.
Ian E. Scott is a Harvard Law School Graduate, lawyer and author of Law School Lowdown: Secrets of Success from the Application Process to Landing Your First Job. You can access the blog for this book by clicking here. Mr. Scott worked as a corporate litigator in the law firm Cleary Gottlieb and currently runs his own law firm Scott Legal, P.C. specializing in Immigration Law & New Business set-up.
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Ian E. Scott, Esq. is the Founder of Scott Legal, P.C. He can be reached at 212-223-2964 or by email at firstname.lastname@example.org.
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