Essential Legal Documents for Buying a Business– Part 2

Hopefully you have read our previous blog in this three-part series discussing the legal documentation that is typically required when buying or selling an existing business. Below is a general description of the first six documents on the list:

1. Purchase Contract . The Purchase Agreement governs the entire transaction. It sets forth the purchase price and each of the terms and conditions of the sale. It is the contract that outlines all of the important issues that impact the sale. It is the foundation of the entire transaction, which means it will also be the basis for any litigation resulting from a breach of the contract.
2. Promissory Note . Unless the buyer is paying the full purchase price at closing, a promissory note will be required for the unpaid balance. The Note sets forth how the unpaid portion will be paid, as well as the penalties for late payments or defaults under the Note.
3. Security Agreement . If the unpaid portion of the purchase price, as evidenced by the Promissory Note, is secured by assets, the purchaser will be required to sign a Security Agreement and/or a Deed of Trust (also called a Mortgage). It is common for a seller to require a lien to be placed on the entity buyer’s property as well as the personal property of any individual guarantors. The Security Agreement creates the lien on personal property while the Deed of Trust or Mortgage establishes the lien on real property.
4. Bill of Sale . The Bill of Sale documents the assignment and transfer of assets from the seller to the purchaser. It is important to note that if the assets also have a title (such as vehicles), they will need to be re-titled in the buyer’s name.
5. UCC-1 Financing Statement . If personal property has been pledged as collateral, the UCC-1 Financing Statement must be filed as evidence of the lien on such property. Filing this lien statement provides notices to all other parties that the seller has a lien on the assets listed in the financing statement. Depending upon where the assets are located, it may be necessary to file UCC-1 statements in different states.