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5 Legal Documents You Need When Buying a Business

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Becoming a business owner is a significant decision. You can no longer rely on the safety of a fixed salary, may have to work well over the average hours of 9-to-5, and must take on more legal and financial liabilities. However, the decision is not without its rewards. If the business is successful, you stand to make more money and ultimately obtain more fulfilment, freedom, and flexibility. Whether you start a new business or buy an established business, it is vital to understand the legal documents involved thoroughly. This article explains five legal documents you will need when buying an established business.

Heads of Agreement

Firstly, the heads of agreement is a preliminary document between the seller and the purchaser that sets out the essential terms and conditions of the business sale. These terms and conditions are often not final and may be subject to further change and negotiation. Therefore, heads of agreement are not generally legally binding. However, the parties may have a general obligation under the heads of agreement to act in good faith to finalise the transaction.

There may also be consequences for a party if the sale does not complete due to an issue they are at fault for. For instance, a buyer may not receive the deposit back if the deal does not finalise because of the buyer’s unreasonable conduct.

Non-lawyers usually prepare heads of agreement and parties tend to use the terms in the heads of agreement to draft the relevant legal documents for sale.

Confidentiality Agreements

Like heads of agreement, a confidentiality agreement (also known as a non disclosure agreement) is a preliminary document between the seller and the purchaser and may be one of the first documents the parties sign. It requires all parties involved in the sale to:

  • keep any information provided as part of sale negotiation confidential; and 
  • only use the information as permitted or agreed by all parties.  

There are usually exceptions to this.

For instance, a party may disclose confidential information where such disclosure is required by law.  

A confidentiality agreement gives the parties (especially the seller) comfort that their business’ confidential information is secure. However, the parties should only provide information in stages and when necessary, irrespective of the confidentiality agreement. This is because the consequences of a confidentiality breach may be more severe than any compensation payable under the confidentiality agreement.

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Sale and Purchase Agreement

The sale and purchase agreement is the main contract between the seller and the purchaser. The seller agrees to sell the business to the purchaser, and the purchaser agrees to provide an agreed purchase price in return. In addition, the sale and purchase agreement sets out information such as the:

  • purchase price;
  • distribution of liability regarding the business;
  • warranties from each party; and 
  • conditions to financial settlement.

The financial settlement will usually occur after the parties sign the sale and purchase agreement as well as satisfy any conditions to the financial settlement. If either party breaches the sale and purchase agreement terms, the other party may seek compensation. All parties need to engage lawyers to review the agreement and ensure the terms are as agreed. The parties must also ensure that:

  • there are no ambiguities in the agreement;
  • the conditions to the financial settlement can be satisfied in time; and 
  • the parties are satisfied with the liability distribution under the agreement.
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Deeds of Assignment for Any Personal Guarantees

Business owners of an established business usually give various guarantees and sureties to secure the obligations of the business. Therefore, the purchaser should work with the seller to transfer any guarantees and sureties to the purchaser or another person as part of the sale. The transfer is called an assignment because the existing business owner assigns their rights and obligations under those documents to the purchaser or another person as the new guarantor. The assignment is documented in a document called a deed of assignment. 

Finance Documents

A purchaser rarely has enough money to purchase a business out of their own funds. Generally, the purchaser will obtain financing from a lender such as a bank and will enter certain finance documents to get enough money to complete the purchase. Finance documents will generally include:

  • the loan agreement, often called a facility agreement;
  • security documents; and 
  • any ancillary documents relevant to the transaction. 

The loan agreement will set out the main terms of the loan, such as:

  • loan amount;
  • repayment terms;
  • the default events; and 
  • any restrictions on the purchaser as the borrower.

The security document deals with terms regarding the property that the lender will have rights over as security for the loan. For instance, for loans for purchasing a business, the security will generally include the property of the business being purchased. 

Key Takeaways

If you are looking into purchasing an established business, you should be aware of the various legal documents involved in the sale. In this article, we explored five legal documents you need when buying a business, such as the:  

  • heads of agreement;
  • confidentiality agreements; 
  • sale and purchase agreement; 
  • deeds of assignment; and 
  • finance documents.

If you need help with purchasing an established business, our experienced business purchase lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

What is a heads of agreement?

The heads of agreement is a preliminary document that will set out non-final and non-binding terms and conditions of the business sale. Often, people will use the terms in the heads of agreement to draft relevant legally binding documents.

What is a deed of assignment?

A deed of assignment is a legally binding document that transfers (or assigns) one party’s legal rights and obligations to another.

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