Essential Legal Documents for Buying a Business– Part 3

Hopefully you have read our two previous blogs in this three-part series discussing the legal documents commonly used when buying or selling a business. Our prior blog provided a brief description on the first six documents and below is a short description of the last six documents typically needed in a purchase transaction:

1. Deed . If there is real property involved in the purchase of the business, the seller must transfer title of the property to the buyer by a deed. The deed must be recorded with the appropriate county office where the land is located. It is important to record the deed as soon as possible after the transaction closes so other parties are put on notice of the change in ownership.
2. Personal Guaranty . When the buyer is an entity and the full purchase price is not paid at closing, the seller usually requires the individuals involved in the purchasing entity to execute personal guaranty agreements. A guaranty is a means for making the individuals personally liable for the debt if the entity defaults on its payments.
3. Escrow Agreement . In transactions where funds need to be held prior to closing, a neutral escrow agent should be used and an Escrow Agreement should be signed. This contract outlines the instructions for holding the funds or items submitted by each party until the closing date, as well as directions for how and when to make distributions. If the purchase of the business does not include the use of an escrow, an Escrow Agreement is not necessary.
4. Assignment of Lease . When the purchase of a business includes acquiring the seller’s interest as a tenant under a rental or lease agreement, an Assignment of Lease is needed to transfer the seller’s rights and obligations under the lease to the purchaser.
5. Consent of Landlord to Assignment of Lease . When a lease is assigned from the seller to the buyer, the landlord must agree and provide its consent to the transfer.
6. Covenant Not to Compete . It is common practice for the buyer to require the seller or owners of the selling business that they agree not to compete with the business that is being purchased. If you do not obtain a non-compete contract, it could result in the selling entity (and its owners) from immediately opening a competing business in a nearby locale. It is essential that you seek advice from an experienced business attorney in drafting a non-compete agreement because the courts strictly construe them.
7. Consulting Agreement . If a purchaser wants to retain the services of certain employees of the seller, a Consulting Agreement can be used to retain them as independent contractors or an Employment Agreement can be used to retain them as an employee.