Closing Documents for Business Sale
Unlike a real estate transaction, business transactions requires far fewer documents and paperwork at closing. A business transaction is not recorded in any governmental registry and typically does not require the payment of state taxes (such as ‘doc stamp’ taxes). Even though a business sale is purely a private affair, there are several very important closing documents which should be carefully prepared prior to the closing. Such business closing documents include the executed purchase agreement, a bill of sale, a corporate resolution authorizing the seller to sell the business, and (if applicable) a certificate of compliance for any state sales tax liability.
Executed Purchase Agreement
- The most important document associated with any business transaction is the executed purchase agreement.
- The purchase agreement is the full and final contract that should memorialize all the terms and conditions of the sale.
- It may take many weeks for both parties to negotiate and agree upon the final version of a purchase agreement.
- Both business buyers and business sellers may choose to seek counsel for help in proposing or negotiating the purchase agreement.
- A purchase agreement may be in the form of an asset purchase agreement (where the buyer buys the assets of the business via their own corporate entity) or a stock purchase agreement (where the buyer individually buys the seller’s shares of the actual corporate entity of the business).
- It is critically important that any and all terms or conditions to the deal be in the final version of the executed purchase agreement.
- If such provisions are not in writing and agreed upon in the purchase agreement, then it will be very difficult to enforce such a provision after the closing takes place.
Bill of Sale
A bill of sale is a formal document that the seller gives the buyer at closing that acknowledges receipt of the funds paid by the buyer and in turn gives the buyer formal ownership of the business. The bill of sale should be prepared by the closing agent or the buyer’s attorney prior to closing. Importantly, some buyers may need to show vendors or customers a bill of sale after the closing in order to show proof that the buyer is indeed the new owner of the business. It is also helpful for buyers to have a bill of sale in order to transfer any business licenses that may be needed in order to operate the business properly.
Seller’s Corporate Resolution to Sell Business
Prior to the closing, the seller must (at least in theory) convene a meeting of all officers and directors of the corporate entity (either a corporation or limited liability company) authorizing the President of the company to sell the business. In practice, very few small businesses have ever convened a meeting of the ‘board of directors’ or have ever drawn up any corporate resolution documents. Nevertheless, such a corporate resolution should be presented to the buyer at the closing.
Corporate Resolution Authorizes Seller to Sell Business
In a corporate resolution to sell a business, the date of the resolution must precede the date of closing, the document should clearly state that the Board of Directors authorizes the President to sell the business, and it must be signed by the President and other authorized officers or directors of the company. The purpose of the corporate resolution gives the seller the legal authorization to sell the business. A business buyer should always demand that the corporate resolution be a part of the closing documents because it legally affirms that the legal seller actually has the power to sell the business.
Corporate Resolution Not Applicable for Stock Purchase Sales
In the case of an asset purchase sale, the legal seller is the corporate entity which owns the business. The President of the company is thus given legal power to sell the business assets on behalf of the selling corporate entity by virtue of the corporate resolution to sell. In the case of a stock purchase sale (which is very rare except with healthcare related sales), the legal seller is the individual seller who is selling their shares of the business to the buyer. Thus no corporate resolution is necessary with respect to stock purchase sales.
Certificate of Compliance Necessary for Sales Tax Liability
A certificate of compliance is a document that business sellers may obtain from the Florida Department of Revenue prior to closing. This certificate may show proof of good standing with respect to any state sales taxes liability for the seller’s corporate entity. Of course, if the business has never had to pay state sales taxes, then no such certificate of compliance is necessary. Many service related businesses never pay state sales taxes. If the company is a retail-related business or otherwise pays sales taxes, then all buyers should require a certificate of compliance from the Florida Department of Revenue prior to closing.
Sales Tax Liability May Trigger a ‘Holdback’ Provision
Unlike federal income tax or payroll tax liability, state sales tax liability attaches to the place of business and may remain with the buyer after the closing. This is the case even when the deal is structured as an asset purchase agreement, which in theory relieves the buyer of liability from prior actions of the seller (since the buyer takes ownership of the business through another corporate entity). Because of the possibility of sales tax liability or other liability (for example to cover future warranty claims), many buyers will require a ‘holdback’ for part of the purchase price after the closing. The ‘holdback’ places a portion of the purchase price in escrow for a period of time after the closing in order to cover the buyer for any of the seller’s liability. Such a ‘holdback’ provision’ must be negotiated in advance as a part of the final version of the executed purchase agreement.
Always use a professional business broker and consult with an attorney prior to closing on any business transaction.
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