The job isn't done until the paperwork is finished. In selling your store, the paperwork can be simple or complex. In fact, if there is no real estate involved, a handshake can seal the transaction. However, most retailers selling a property worth $50,000 to $250,000 or more will want a non-disclosure agreement, offering a memorandum, sales agreement with a non-competition clause, and maybe a promissory note. Corporate sales will require more paperwork and should involve an attorney.
The first document that potential buyers should sign for you is a non-disclosure agreement. It says that they will not disclose or use the proprietary information that you supply them in a way that will harm your business. Otherwise, a potential buyer could learn the valuable information you've developed about the local market and your store operations, then open a store nearby and take your business.
Generic non-disclosure agreements are available at office supply stores and in books that focus on selling your business. Unless you're knowledgeable in business law, you should have an attorney draw up the non-disclosure agreement or at least review the form you will use.
Your store's offering memorandum outlines what your business is, what it does, how it does it, and the results: profits. It is a summary of how your store works. It's a valuable document that has cost you thousands of dollars in efforts to develop. It represents the results of your business plan. Don't let anyone see it without their first signing a non-disclosure agreement.
A typical offering memorandum for a retail store will include:
Sales and marketing procedures
Financial information (specifics available)
Reasons for selling
Price and terms
Additional documents, including profit-and-loss statement and balance sheet, can be provided when the prospective buyer is ready to move to the next level. Most buyers will want an independent audit or verification of the facts before proceeding.
The sales agreement outlines how the sale is structured. This can be important not only to the buyer and seller, but also to the tax collector. Yes, you probably will have to pay income tax on the sale of your business. Whether the tax is based on ordinary income or capital gains, (lower) tax rates depends on how the sale is structured and reported. You'll need a tax adviser to help you set up the sale to benefit the seller while meeting the requirements of the buyer.
The typical asset sale agreement will include:
Names of seller(s) and buyer(s)
List of assets being sold by seller
List of liabilities being accepted by buyer
Sale price, typically broken down by type of assets
Price of inventory and how it is determined
How accounts payable will be paid
Terms of sale: deposit, payment at closing, promissory note (if any)
How seller's debts and obligations will be handled
Covenant not to compete
How disputes will be handled
The covenant not to compete typically says that the seller will not start or work for a similar store within a specific geographic area for a specified time. This covenant is not easily enforceable in many jurisdictions if the seller must find employment after the sale.
In many sales, the buyer has all cash or has obtained financing. In others, the seller agrees to finance a portion of the sale under a promissory note and security agreement. The security agreement says that the business assets—and any buyer assets that are agreed upon—serve as security for the note. If not paid as agreed, the security can be sold to collect the balance.
The promissory note outlines the terms of payments. Commonly, equal monthly payments are made over a three- to five-year period at a specified interest rate, often from 8 to 12 percent, until paid off. A large payment at the end of the note, called a balloon payment, may be required.
If selling your business on a promissory note, it is especially important to have legally binding documents. Use an attorney to draw up all the documents or, at the least, to review form documents.