12 Legal Documents Needed in a Business Purchase – Part 2
Hopefully you have read our prior blog that is the first in a three-part series discussing the legal documents commonly used in purchasing or selling a business. Below is a brief description of the first six documents in our list:
- Purchase Contract. This document is the most critical because it outlines the purchase price and all of the terms and conditions of the sale. It details all of the key matters that relate to the transaction. It will also form the foundation of a suit for damages should either party fail to perform under the contract.
- Escrow Agreement. If the transaction includes an escrow for the purchase, an Escrow Agreement should be used to provide a neutral escrow agent with instructions to hold the items submitted by each party until the closing, and directions for delivering the items to the appropriate party. This document is not necessary if the purchase doesn’t include the use of an escrow.
- Bill of Sale. The seller executes this document and delivers it at closing to assign and transfer the assets detailed in the Bill of Sale to the purchaser. In addition to transfer pursuant to the bill of sale, assets that have a title, such as a vehicle, will need to be re-titled in the name of the Buyer.
- Promissory Note. If the buyer does not pay the full purchase price at closing, any unpaid portion of the balance owed should be evidenced by a Promissory Note executed by the purchaser. The Note outlines the terms and conditions for making future payments, and also the penalties for late or default payments.
- Security Agreement. If the remaining balance owed at closing and evidenced by a Promissory Note is secured by collateral, a Security Agreement and/or Deed of Trust will be needed. Most sellers require a lien on the buyer’s property (the entity) and personal property of the individual guarantors. A Security Agreement establishes a lien on personal property and a Deed of Trust creates a lien on real property.
- UCC-1 Financing Statement. This document is only necessary if the transaction involves the pledge of personal property as collateral. A UCC-1 Financing Statement evidencing a lien on personal property should be filed with the Arizona Secretary of State to perfect the lien and provide notification to other parties that the seller has a lien on the items listed in the document. It is important to note that if the debtor is not an Arizona resident (or is incorporated elsewhere), the seller should also consider filing a similar document in that state.
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