The Purpose of the ‘Closing’ in a Business Sale

What Is A Business ‘Closing’?

The final step to complete a business sale is the closing. Frequently conducted electronically, a business closing is where the written and signed closing documents are exchanged, and whereby the seller receives payment as called for in the purchase agreement. The parties may also reimburse one another for any customer deposits (held by the seller and payable to the buyer) or pre-paid expenses the seller incurred that covers dates of service after the closing date (such as rent or payroll). If applicable, the buyer receives the keys and any other items (such as passwords, customer lists, or secret recipes) necessary to become the new owner of the business. Generally, the closing is for the purposes of legally transferring ownership, executing all final documents, and the exchange of money for assets.

Who Conducts the Business ‘Closing’?

The buyer typically proposes the purchase agreement which is the written contract that memorializes all of the terms of the deal. The purchase agreement should outline when the closing will take place, who the closing agent will be, and where the closing will take place (and specify if to be done electronically). The buyer’s attorney is usually the closing agent and conducts the closing. Otherwise a closing agent or escrow agent should be specified in the purchase agreement. Once the buyer proposes the purchase agreement, the parties may negotiate the terms of the closing in the same manner as other deal terms. The buyer usually pays for the closing costs, but the costs may be apportioned as a deal term agreed upon in the purchase agreement.

Purpose and Goals of ‘Closing’

The main purpose of a business closing is monetarily compensating the seller in exchange for giving the buyer full and complete title to the business. The title should be without any liens or debts, other than debts that are disclosed and assumable as described in the purchase agreement. The general goals of a business closing are to properly identify the seller, affirm the seller’s ability to sell the business, affirm that there are no liens on the business, provide the buyer a proper bill of sale, and affirm that the buyer has completed their formal due diligence of the business.

Establish Identity of the Legal Seller of Business

An often overlooked part of a business sale is properly identifying the seller. Most business sales are conducted via an ‘asset purchase agreement’ whereby the buyer creates their own corporate entity which purchases the assets of the seller’s corporate entity (the seller’s corporate entity is usually abolished after the sale). The actual legal seller is thus the seller’s corporate entity, not the individual seller. This corporate entity or legal seller must be properly identified in the purchase agreement as well as in the closing documents. All of the individual officers, owners, or shareholders of the corporate entity must be present or accounted for at the closing.

Seller’s Corporate Resolution to Sell

The seller’s ‘corporate resolution to sell’ is a closing document that affirms to the buyer that the individual seller (as the sole owner or controlling shareholder of the corporate entity) has the legal authority to sell the assets of the business to the buyer. This ‘corporate resolution to sell’ properly identifies the legal seller, and then affirms that the seller’s corporate entity called a shareholder meeting (where all shareholders or officers were present). The shareholder meeting grants the controlling shareholder (or individual seller) the legal right to sell the assets of the seller’s corporate entity. A ‘corporate resolution to sell’ eliminates any doubt as to the identity of the seller and their ability to sell the business to the buyer.

Affidavit of No Liens or Debts

A key component of any business closing is an affidavit (typically notarized) provided by the individual seller affirming that there are no liens or debts of the business. Note that any company debts must be either extinguished at closing or properly assumed by the buyer as negotiated and agreed upon in the purchase agreement.  Uniform Commercial Code (UCC) Liens are publicly disclosed in the Florida Secured Transaction Registry, so a buyer may always verify the absence of any liens or attachments on the business.

Bill of Sale

A bill of sale is a legal instrument that provides legal proof of ownership for many different items including businesses. It gives buyer legal protection should any vendor, bank, or government official ask for legal proof to verify that the buyer is indeed the owner of the business. The bill of sale should clearly state the identities of the buyer and seller, the business being purchased, and the date of the closing.

Buyer Signs Off on Due Diligence

Another major part of a business closing is the buyer giving formal assurances that they have completed their formal due diligence. This formal assurance is given through a ‘due diligence release form’ which absolves the seller from any future liability associated with the buyer’s due diligence. The buyer specifically states in the ‘due diligence release form’ that they have received all their requested financial and company information from the seller as a part of their formal due diligence, and that they are satisfied with its results.

Seller-Financed Transactions Create Risk for Sellers

  • A seller-financed business transaction is where the seller holds a Note as a part of the purchase price.
  • This means that the seller finances part of the purchase price to the buyer under mutually agreeable terms.
  • The buyer will thus owe the seller money after the closing.
  • This creates the need for the buyer and seller to have a Seller’s Note (often accompanied by a promissory agreement) at closing, which specifically describes the financing terms and conditions.
  • The seller will typically secure the Note by placing a UCC Lien against the business (including all of its tangible and intangible assets) at closing or immediately after closing.
  • If the buyer is obtaining external lending (including loans backed by the Small Business Administration or SBA), then the Seller’s Note is invariably made subordinate to the lien from the bank.
  • It is highly recommended that for seller-financed transactions, sellers seek legal counsel to ensure their legal rights are upheld.

A business ‘closing’ is not publicly disclosed, and is typically far less complicated and costly than real estate closings. With proper planning and guidance, both the buyer and seller should come away satisfied that their legal and economic interests were fairly represented at the closing.

Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.