The closing is the formal transfer of a business. It usually also represents the successful culmination of many months of hard work, extensive negotiations, lots of give and take, and ultimately a satisfactory meeting of the minds. 

The document governing the closing is the Purchase and Sale Agreement. It generally covers the following:

• A description of the transaction – Is it a stock or asset sale?
• Terms of the agreement – This covers the price and terms and how it is to be paid. It should also include the status of any management that will remain with the business.
• Representations and Warranties – These are usually negotiated after the Letter of Intent is agreed upon. Both buyer and seller want protection from any misrepresentations. The warranties provide assurances that everything is as represented.
• Conditions and Covenants – These include non-competes and agreements to do or not to do certain things.

But before the sale of a business can close, there are several critical steps that cannot be ignored. We’ll take a closer look at them in this article.

At CBB, our team has more than 230 years of combined experience. We’ve guided thousands of business owners through successful sales, closing transactions worth more than $1 billion. Our depth of experience means you’re never navigating unfamiliar territory alone. Want to discover how we can help you close the deal? Contact us.

Four Critical Key Steps to Take Before the Sale

There are four key steps that must be undertaken before the sale of a business can close:

1. The seller must show satisfactory evidence that he or she has the legal right to act on behalf of the selling company and the legal authority to sell the business.
2. The buyer’s representatives must have completed the due diligence process, and claims and representations made by the seller must have been substantiated.
3. The necessary financing must have been secured, and the proper paperwork and appropriate liens must be in place so funds can be released.
4. All representations and warranties must be in place, with remedies made available to the buyer in case of seller’s breach.

There are two major elements of the closing that take place simultaneously:

1. Corporate Closing

The actual transfer of the corporate stock or assets based on the provisions of the Purchase and Sale Agreement. Stockholder approvals are in, litigation and environmental issues satisfied, representations and warranties signed, leases transferred, employee and board member resignations, etc. completed, and necessary covenants and conditions performed. 

In other words, all of the paperwork outlined in the Purchase and Sale Agreement has been completed.

2. Financial Closing

 The paperwork and legal documentation necessary to provide funding has been executed. Once all of the conditions of funding have been met, titles and assets are transferred to the purchaser, and the funds delivered to the seller.

It is best if a pre-closing is held a week or so prior to the actual closing. Documents can be reviewed and agreed upon, loose ends tied up, and any open matters closed. By doing a pre-closing, the actual closing becomes a mere formality, rather than requiring more negotiation and discussion.

The closing is not a time to cut costs – or corners. Since mistakes can be very expensive; both sides require expert advice. Hopefully, both sides are in complete agreement and any disagreements were resolved at the pre-closing meeting. A closing should be a time for celebration!

But when should the buyer take over the business? Is it problematic for them to do so before the closing? We’ll examine this important detail.

Should the Buyer Take Over the Business Before Closing?

The answer is a resounding NO! 

Confusion and misunderstandings often occur if the soon-to-be new owner takes over or works in the business before closing. In our experience this has never been a winning scenario.

There are times when the buyer and seller think it would be a great idea if the buyer began operation of the business prior to the closing of the sale. Why? Here are some typical reasons:

• The buyer needs the income.
• The seller has really “had it.”
• The time it takes to close a deal has been excessively long.
• The seller is in poor health and can’t operate the business (or something similar.)
• The buyer feels the business is deteriorating and wants to get in before it all goes too far downhill.

These sound reasonable because both the seller and the buyer have a shared goal: to maintain the business and transfer ownership successfully. In analyzing the reasons for early possession, does the end justify the means? 

The answer is again a resounding NO. 

Sellers, who often are as enthusiastic about early possession as the buyer, should remember that the sale has not closed and the buyer may still have second thoughts. Early possession of almost any business can create a real obstacle to a closing. It makes good business sense to let the early possession “idea” remain just that — an idea and nothing more.

We understand that there are hundreds of details that go into the complicated process of selling or buying a business. That’s why we’re going to examine what a successful closing should look like. 

The Closing Table

Now that all of the contingencies have been satisfied and removed from the contract, it’s time to draft the final closing documents. These documents may be prepared by the Seller’s attorney, Buyer’s attorney or a third-party attorney employed by the business broker.  

The basic documents associated with the transfer of a small business generally include:

• The Bill of Sale
• The Purchase/Sales Agreement
• The Promissory Note
• The Security Agreements
• The UCC Financing Statements
• The Bulk Seals Affidavits
• The Board of Director’s (authorization to sell) Resolution
• Real Estate Documentation (if appropriate)
• Lease Agreements
• Other Side Bar Agreements
• Closing Statements

Based on the agreement between the parties, as stated in the contract, the above closing documents are prepared and furnished to all parties (and their attorneys) several days prior to closing.  

Any other minor changes are made and agreed to prior to closing. There should be no last-minute or unexpected changes at closing.  If the parties have followed the correct sequence of events throughout the purchase/sale process, the actual closing will almost be “anti-climatic.”

The principal parties will meet at a specified time and place on the day of closing to:

• Execute (sign) the pre-approved closing documents.
• Transfer proceeds of the sale to the Seller.
• Transfer ownership of the Business to the Buyer.

A smooth and successful closing is certainly a credit to the principal parties, as well as any intermediaries involved in the sale.

Closing the Deal: A Simplified Checklist:

• Prorate rent, utilities, inventory to time of closing.
• Review Seller’s Business Documents: i.e. tax releases, corporate filings
• Promissory Note Documentation: applicable if Seller will carry financing
• Security Agreement: applicable if buyer is obtaining outside financing
• UCC Financing Statement: applicable if buyer is obtaining outside financing
• Lease Assumption or Renegotiation
• Vehicle Transfer Documents: applicable if the purchase includes vehicles
• Bill of Sale: will transfer the ownership of the other tangible business assets not specifically transferred on their own.
• Patents, Trademarks, & Copyrights (if applicable)
• Franchise Documents (if applicable)
• Closing or Settlement Sheet: lists all financial aspects of transaction
• Non-Compete Covenant (if applicable)
• Consultation Agreement: if seller has agreed to assist the new owner for a period of time
• Asset Acquisition Statement: IRS Form 8594

Let CBB Handle the Details for Successfully Closing the Deal

Our extensive network of experts means that we can handle every angle of your deal, from valuation and marketing to negotiation and closing, so nothing falls through the cracks. 

We invite you to contact us so we can work together toward a closing that is as stress-free as possible.