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The final step of selling your business is the closing process, which officially transfers the ownership of the business from the buyer to the seller. Because of the many legal and financial aspects involved in this process, it can be a challenging event, and it's often helpful to have a business broker guide you through the process.. It's essential that the closing is handled correctly to avoid any potential issues down the road.
Note: This process covers an “asset sale” which is the most common way mainstreet businesses are sold. The alternative is a “stock sale” which follows a different process.
If you’ve ever wondered what the closing process entails, here is an overview of the 4 steps you can expect:
Step 1. Purchase Agreement and Due Diligence
Once a potential buyer is serious about purchasing your business they will submit a purchase agreement. Here is what’s included in the purchase agreement:
Purchase price and structure of the sale
Contingencies
Due diligence process
Closing terms
You will either accept the terms of the purchase agreement, submit a counter offer, or decline.
After this document is agreed upon and completed, the buyer will conduct due diligence. Due diligence is the process of thoroughly examining the business and its operations to ensure that there are no hidden problems or liabilities.
During this stage, a buyer will typically review the following documents:
Financial statements (including balance sheets, cash flow, income statements, etc.)
Tax returns
Customer and vendor contracts
Legal documents
Lease agreements
Any other documents relevant to the sale of the business
It’s important to note that before entering any final negotiations or signing a purchase agreement, you will want to work with your experienced team of advisors (such as an attorney and business broker) to be sure the deal is fair and legally sound.
Step 2. Preparing for the closing
As closing day approaches, all of the necessary documents must be prepared and completed. Additionally, any calculations (such as prorated rent and utilities) are factored into the final purchase price.
Here are the items that may be needed on closing day:
Final purchase price
Purchase agreement
Corporate documents
Government and tax forms
Transfers of leases, agreements, and contracts
Bill of Sale
Keep in mind that this list is not exhaustive, and you don’t need to go through this process alone. Working with a broker, attorney, or accountant on many of these documents ensures accuracy and makes the process less stressful for you.
Step 3. Closing day
When all documents are ready to be signed and due diligence is complete, it’s time to set a closing date and time. The focus of the closing day is to review and sign all the final paperwork to complete the sale.
The closing process is generally managed through escrow.
At the closing, you will need to submit or sign the following documents:
Purchase and sale agreement
Any loan documents involved
Lease transfer documents
Forms to transfer patents, copyrights, trademarks, etc.
Articles of amendment that will change the name of the business
Closing and settlement form
Depending on specific sale and industry, you may be required to sign more documents at the closing.
Step 4. Post-closing activities
While closing day marks the official transfer of business from the seller to the buyer, other items will still need to be completed to provide a smooth transition of ownership. Keep in mind that the number of items that need to be transferred will depend on how involved you still are as the seller. If you plan to stay on and maintain day-to-day operations, you will not need to transfer as many items to the new owner. On the other hand, if you’re planning to retire and fully part ways, you will need to transfer more items to the new owner.
The following items will need to be reviewed and completed after closing:
Business operations items such as alarm codes, computer or software equipment, keys, and manuals will need to be transferred to the new owner.
All leases as well as client and vendor lists will need to released to the new buyer.
If you own an LLC or other legal entity, this will need to be dissolved with the IRS and the state.
Notify employees, vendors, and clients of the finalized sale.
Before finalizing the sale of your business, you should have a clear conversation with the potential buyer about your exit plan. This will determine what items need to be transferred and what time frame the new buyer can expect up front.
Have questions?
The process of selling your business can be time-consuming with many financial and legal aspects involved at closing. If you’re considering selling your business, contact us today for helpful guidance throughout the process.