What are the main steps typically involved in a business/company purchase transaction and what legal documents are required?
Popular articles
Purchasing a business or a company indeed may be an easier option than starting your business from ground zero, but it is not an entirely automatic, straightforward process. Certain steps are typically involved in a business purchase transaction accompanied by their respective required legal documents.
A business/company purchase transaction can broadly be divided into three main stages:
- Pre-purchase negotiations
- Purchase of business/company
- Post-purchase formalities
Stage 1: Pre-purchase negotiations
Generally, the first stage encompasses all the necessary what steps that need to be taken before purchasing the desired business/company. This stage mostly involves negotiations regarding, and in preparation for, the purchase and calls for various legal documents:
Non-Disclosure Agreement
A Non-Disclosure Agreement is essentially a contract whereby you and the seller agree not to disclose confidential information that has been shared between the two of you in the process of conducting business together. The information communicated between you, the purchaser, and the seller in the process of business/company transfer are no doubt extremely sensitive as they detail the finances, assets, debts, etc. of both parties. The process itself may also be confidential as the seller may want to circumvent any worrying of staff or clients from any leakage information about a potential sale of the business too early on in the process.
Please see our Non-Disclosure Agreement template and easily customise it according to your needs.
Due diligence checklist
You will first need to conduct Due diligence on the business/company you are planning to purchase. This means investigating the business/company to make sure that you want that specific business/company, and to be aware of any potential drawbacks involved in purchasing it. For instance, drawbacks may include existing liabilities and debts that will be transferred to you after the purchase.
Basically, you are researching the company and everything else that may affect your decision in purchasing it or not. At the end of your Due diligence, you should have a better idea of whether it is the right company for you.
One of the most important things to do during Due diligence is to perform valuation to decide what the company is worth and how much you should purchase it for. You could also consider getting an independent business valuation as it will be more objective and realistic as opposed to the target company’s own valuation.
For more information on due diligence, please see FAQ on “What is due diligence and what does it include?”
Not sure what to check for when conducting Due diligence into the business/company you want to purchase? You may find our Due diligence checklist helpful.
Memorandum of Understanding / Head of Terms
The Memorandum of Understanding / Head of Terms is an agreement between you and the seller, representing a willingness to continue negotiations, and on what preliminary terms, leading up to the formal contract (i.e. the sale and purchase of business/company agreement). While the content of the Memorandum of Understanding / Head of Terms are essentially “subject to contract”, and hence not legally binding, they can nevertheless create legal obligations that will impact your and the seller’s ability to negotiate terms, such as the price, later on.
Please see our Memorandum of Understanding/Head of Terms template and easily customise it according to your needs.
Stage 2: Purchase of business/company
This is arguably the most important stage of them all as it corresponds to the drafting of the key contractual legal agreement which sets out the terms of the purchase and the details of the actual sale.
Depending on whether you are purchasing assets or shares, you will need one of the following legal documents:
Sale and purchase of business (assets)
This legal document applies if you are purchasing only certain business(es) from the company rather than the entire company. This similarly applies to a sole proprietor or partnership business. In other words, share acquisition is irrelevant as it is a transfer of business without any transfer of shares in the holding company if any.
The contract for the sale and purchase of business may include, but is not limited to, the following details:
- Stock
- Plant/machinery
- Creditors/debtors
- Employees
- Contract/clients
- Assignment deeds (i.e. leasing contracts and intellectual property)
- Landlord consents
Please see our Assets Acquisition Agreement / Sale and purchase of business template and easily customise it according to your needs.
Sale and purchase of a company (shares)
This legal document applies if you are acquiring all the shares in the company which runs the business. The contract for the sale and purchase of the company may include, but is not limited to, the following details:
- Price
- Completion date
- Warranties and representations by the seller
- Indemnity for tax liabilities
- Limitation of seller’s liability
Please see our Company Acquisition Agreement / Sale and purchase of company template and easily customise it according to your needs.
To understand the difference between asset purchase and share purchase, read FAQ on “What is the difference between an asset purchase and a share purchase?”
For more information on the two types of purchases, namely that of businesses and companies, please see FAQ on “What does it mean to purchase an existing business?”
Stage 3: Post-purchase formalities
Deed of Novation
A Deed of Novation transfers the rights and obligations of one party to a contract to another third party. The terms of the original contract essentially remain unchanged, apart from the fact that the identity of the original contracting party is being substituted with a third party. The new party (i.e. the former third party), consequent to the Deed of Novation, assumes all legal responsibility, including rights as well as liabilities and/or obligations, under the contract.
In the sale and purchase of a business/company, the seller may need to transfer their existing contracts and obligations to you, the buyer. This will require a Deed of Novation.
Please see our Deed of Novation template and easily customise it according to your needs.
Additional steps and legal documents
You should be aware that depending on the nature of the business/company which you are acquiring, there may also be additional practical steps and legal documents required post-purchase.
Please note that this is a general overview of the main stages and legal documents typically required for a business purchase transaction and is by no means exhaustive. Details may vary depending on the particular nature of your business purchase transaction. The complexity and time for completion of the business purchase transaction are contingent on the nature, size, and complexity of the to be purchased company.
Due to the intricacies and technicalities involved, it is strongly recommended that both parties, the purchaser and the seller, acquire professional legal and accounting assistance throughout the whole transaction. This will reduce significant risks that could jeopardise the result of your business/company sale and purchase transaction.
Key takeaways
- Typically, a business/company transaction involves three main stages: Pre-purchase negotiations, Purchase of business/company, and Post-purchase formalities.
- The various legal documents required include, but are not limited to: Non-Disclosure Agreement, Exclusivity Letter, Due diligence checklist, Memorandum of Understanding / Head of Terms, Sale and purchase of business or Sale and purchase of the company, and Deed of Assignment / Deed of Novation.
- You may access our templates for the aforementioned legal documents required for a business/company transaction and tailor them to your own needs.
