Small business owners are often surprised at the number of contracts necessary to close a business acquisition. While each transaction is unique, here are some of the common legal documents negotiated:
Nondisclosure Agreement (NDA): A mutual NDA allows a buyer and a seller to exchange non-public, confidential information in the due diligence phase. For example, a seller may provide a buyer with financial statements, customer lists, channel partners, and manufacturing processes. A seller may request a buyer to provide financial statements or other proof of funds.
Letter of Intent (LOI): An LOI outlines key deal points between a buyer and a seller, and should not be binding. The LOI presents a great way for business people to ensure they are on the same page before spending too much time or money in attorneys’ fees. Term Sheets and Memoranda of Understanding are similar in function, but different in format than Letters of Intent.
Purchase Agreement: The purchase and sale of a company occurs either through an equity purchase or an asset purchase. Mergers are a related, but less often used, transaction where two entities are combined into one. In an equity purchase, a buyer acquires all the stock of a corporation from the shareholders, or all the membership interest in an LLC from the members. In an asset purchase, a buyer acquires only selected assets and selected liabilities of a seller. All the other assets and liabilities stay with the seller. The choice of an equity or asset purchase has tax implications and is important for risk allocation purposes.
Bill of Sale: This document is used in asset purchase transactions to transfer title to tangible assets such as machinery, equipment, inventory, and furniture.
Assignment and Assumption: This document is used in asset purchase transactions to transfer title to intangible assets such as software, contracts, and other intellectual property. In smaller transactions, assignment and assumption may be included as part of the asset purchase agreement.
Promissory Note: A promissory note states the terms by which a buyer would make one or more delayed cash payments to a seller. Promissory notes typically include the amount of each payment, the length of the payout, and the interest rate. Promissory notes may be secured or unsecured.
Board/Shareholder Written Consent: Often overlooked in small business acquisitions, corporate or membership written approval are important to ensure a buyer and a seller have the required authority to close the transaction.
Shawn Peddycord is a business acquisitions attorney located in North County San Diego. He represents clients in a variety of asset and equity purchase and sale transactions, and has extensive experience in drafting and negotiating commercial contracts. This blog is for educational purposes only, and is not intended as legal advice or a substitute for legal counsel.