Starting a business or purchasing a business is a document-intensive process and, as with any time sensitive and financially critical project, it is particularly important that you have a detailed checklist of all essential documentation.
Fundamentally, the major documentation involved will relate either to the transfer of the business and its assets or to the set-up of a new business. With a business purchase the main documentation revolves around transferring the assets. Usually, this entails a master document called a Share Purchase Agreement (or an SPA).
An SPA is the backbone of the documentation and normally contains a list of the other peripheral documents that you will need to agree and complete before the sale takes place. This acts as a useful checklist and also ensures that legal processes are followed. Any documents that are listed as annexed or required to be completed before the sale can proceed are considered as ‘conditions precedent’. This means that the SPA will not become effective until all peripheral documents have been agreed and signed.
In addition to the main SPA, other agreements apply that deal with each of the individual assets or aspects of the business. Typically, this will include an agreement for every type of asset group such as plant and machinery, vehicles, work in progress, land, buildings and stock, etc. Other common agreements include an agreement to deal with the employees who are transferring and any intellectual property rights that are part of the business.
It is also important to consider other factors, not just the actual assets that are being dealt with as part of the purchase of a business. In most cases, for example, a transition period is agreed when the new owners will take control of the business. It is common for the managers or influential individuals to remain with the business for some time after the actual completion date; this is regularly negotiated as a term in the SPA and will require certain key personnel to assist in training the new management team.
This transitional phase can be hugely beneficial in maintaining client and customer confidence, in terms of quality and consistency, as well as assisting with learning exactly how the employees operate within the business. In the same clause, it is normal to have some sort of restriction placed on the future actions of the previous owners, in order to prevent them from setting up a competing business in the same geographical region. Similarly, it is normal to have a written restriction on the previous owners using customer contacts.
Purchasing an existing business is highly document intensive and there will be multiple different agreements to consider;
central to these documents is normally the SPA which lists all other required documents;
when completing these documents, consider the period immediately after the sale, to ensure that the transition is seamless.