Understanding the Closing

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After all the decisions have been agreed upon, it is finally time to prepare for the closing.  Although an attorney will prepare the closing documents, it is important to be prepared and understand what to expect.  An advantage of buying an ongoing business is that the business continues to operate immediately after the closing papers are signed.  

Because some continuing expenses must be prorated, the division will be agreed upon by the buyer and seller and included in the closing papers.  If the work in progress is a consideration, it is unlikely that all jobs will be completed before closing.  When inventory is ordered for a specific job to be completed and billed after closing, the seller wants to be reimbursed for his/her inventory expenses attributed to that job. Also, when labor is allocated to a specific job to be completed and billed after closing, the seller wants to be reimbursed for his/her labor expenses attributed to that job.  Another consideration is the backlog of future jobs, which is attractive for a buyer.

A tax clearance form must be filed after closing, which will declare the closing date.  The seller will be responsible for all taxes through that date, and the buyer will be responsible for all taxes after closing.

Accrued vacation time should be discussed.  Sometimes the buyer will agree to honor accrued vacation time for employees as a sign of good faith; otherwise, the seller will pay employees for accrued vacation at the time of closing.  Health insurance offered to employees should also be prorated if it is already offered to employees.  If there are temporary employees, it may be necessary to divide their cost if their employment lingers after closing.

Some advertising expenses will likely need to be divided if they are ongoing.  Some printed ads are paid annually or monthly, and internet ads are usually paid monthly.

It is usual for the seller to cancel his/her insurance effective the date of closing and the buyer to begin insurance on that date.  However, insurance premiums proration may be necessary if the buyer is retaining the seller’s insurance.

Leasing the location of the business could require a proration, depending on how it is handled.  The buyer must be approved by the landlord, who will either write a new lease or prepare a valid lease assignment, requiring the seller to remain on the lease throughout the current term.  The buyer could also get a valid sublease of the existing lease.  Both the rent and common area maintenance charges are normally prepaid a month in advance.

Some utilities may be assigned to the location.  If they are, they will need to be prorated at closing.  However, most utilities will be stopped by the seller and started by the buyer effective the day of closing.  Everything will be changed to the buyer’s name and the buyer will make any deposits necessary. 

The list of assets included in the sale of the business will be included in the final documents, as they will be owned by the buyer.  In addition, contracts will sometimes be in place for equipment and maintenance that is leased or on a payment plan.  The buyer will take over the payments for these items, and a proration may be needed to balance what has been paid and what is owed.  Ideas of possibilities that might have contracts are the following:  telephone system, office equipment, security system, computers, and ice machines or coffeemakers if the business is a restaurant.

Closing on the first day of the month will likely reduce the number of prorations needed, as many of the items mentioned in this article are paid the first day of each month.  The date for the closing is selected by the buyer and seller, and everything will be adjusted accordingly.  Your business broker can assist you in choosing a closing attorney.  It is best to have a closing business attorney prepare the documents, with an attorney for the seller and one for the buyer review the prepared documents.  This is usually the best and least expensive.  Let’s close!        

  • Author: Pat Jones
  • Title: Business Owner - Business Broker
  • Company: Pat Jones Business Brokers
  • Company Website: http://www.patjones.biz/
  • Date: September 12, 2019
  • Category: Buying a Franchise or Business
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