What financial and legal documents do I need when buying a business?

Buying a business can be a complex process, but there are a number of documents that can be used to guide your purchase to ensure your financial and legal position is secure.

No doubt you’ll find yourself surrounded by a mountain of paperwork, but when you know exactly what documents you require, navigating the administrative processes of a business acquisition can be made easy on yourself.

The following guide contains details of the main financial and legal documents you will need when buying your new business.

Confidentiality Agreement

No matter how certain you or your seller may be about the intentions of the other party, the transfer of a business is an incredibly sensitive process. Finances, assets, debts – all aspects of both parties will be scrutinised. It’s also possible the seller will want to avoid worrying their staff or clients by allowing news of a potential sale to leak early on in the process. Before signing this agreement, however, ensure you seek legal advice to make sure your obligations as set out in the contract are reasonable.

Heads of Terms

Heads of Terms documents can also be referred to as one of the following:

• Heads of agreement


• Memorandum of understanding


• Letter of Intent

This document outlines specific key terms of the deal for each party involved. These documents should be prepared by the buyer and it’s crucial that you seek legal advice before handing them to the other party; Heads of Terms are “subject to contract” and therefore not legally binding, but can create legal obligations that will impact on your ability to negotiate price later on.
See here for a fuller description of Heads of Terms, together with a sample agreement.

Exclusivity Agreement

A document that is very important to you as the buyer, the exclusivity agreement allows you a specified period of time to negotiate the sale with the current owner whilst preventing them from actively seeking another buyer or negotiating with another party. This document can be created in its own right or presented as part of the Heads of Terms, but either way it should be signed as soon as possible to ensure you are not forced to battle with another party during the buying process.

Due Diligence Questionnaire

Due diligence is an important process that ensures no problems or liabilities are overlooked ahead of the purchase taking place. As the buyer, this particular process is mainly for your benefit, although it’s important that both parties are aware of what it entails.

Speak to your financial and legal advisors before sending the seller a questionnaire to ensure all aspects of the business are being scrutinised, and make sure you take time to consider their responses before proceeding with the purchase. If you become aware of any problems during this process you have three main options: abort the deal, renegotiate the price, or seek protections that will prevent these problems from having an impact on you in the future.

Acquisition Agreement

The acquisition agreement is a key legal document that will define the agreed terms of the purchase and set out the exact details of the sale, including price and time frame. There will also be a number of documents included within it that are designed to protect you, the buyer, both now and after the transaction has taken place. These documents may include warranties (confirmation of contractual promises), indemnities (details of compensation offered should certain liabilities arise) and covenants (preventing the seller from setting up a competing business or stealing clients). The acquisition agreement will differ depending on the type of purchase you are making:

Asset agreement: Some businesses without shares can only be purchased via assets, but others can be purchased this way through choice. As a buyer, choosing to buy via assets can be beneficial as you can carefully select the aspects of the business you want to buy. Of course, an asset purchase requires a detailed asset purchase agreement that lays out exactly what will be transferred, covering aspects including the following:

• Stock


• Plant/machinery


• Creditors/debtors


• Employees


• Contracts/clients


• Assignment deeds (covering leasing contracts and intellectual property)


• Landlord consents

Share agreement: Sellers usually prefer to sell the shares of their company as this allows them a definitive exit from their business. As the buyer, purchasing via a share purchase agreement means buying all assets and liabilities of the company, regardless of whether or not you want them. To ensure that you’re legally covered and reduce the number of liabilities for which you take responsibility, your share purchase agreement should include:

• Warranties


• Indemnities


• Limitation of liabilities


• Restrictive covenants


• Tax indemnities

Disclosure Letter

The disclosure letter will address many of the areas above and lay out the specific disclosures that the seller is making ahead of the sale. Any issues or problems raised in this letter will be considered disclosed ahead of the purchase, and as such you will be unable to make a warranty or indemnity claim on anything stated within. However, if you address these issues before the sale is completed you could use them as a trigger for the renegotiation of price.

Completion Documents

If you’re purchasing a company via the method of asset purchase, you will need to ensure a number of practical steps are taken, such as sorting VAT, payroll and national insurance. A document known as a Completion Agenda will ensure these are all ticked off.

For a share purchase, you will be required to write up Board Minutes for the share transfer as part of other formalities that should take place ahead of the completion of the sale.

The list of documents above may appear vast, but all are in place to ensure your purchase goes as smoothly as possible by giving both parties the maximum amount of protection in the future. As long as you have the right advisors on board, these documents should give you the confidence to go ahead with your business purchase and focus on what’s important: transforming it for the future.



Looking for more tips on buying a business? Take a look at our other articles:
The top 10 questions to ask a seller before buying a business
Legal essentials when buying a business
M&A insurance: Are you covered?
The due diligence process

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