While some similarities exist between the processes of business purchase and sales and commercial real estate transactions, a closer look reveals distinct differences especially in the sequence of legal documents and the timing of due diligence. Understanding these sequences is vital for anyone involved in such transactions, ensuring clarity, efficiency, and a smooth and easy closing process for both buyer and seller. This article will highlight the key documents in the process for each type of transaction—and for best results be sure to have a well-qualified and experienced attorney involved before the first documents are signed.

Business Purchase and Sales:

1. NDA (Non-Disclosure Agreement): The journey typically begins with the signing of a Non-Disclosure Agreement (NDA), safeguarding confidential information shared during negotiations.
2. Term Sheet: In larger or more complex deals the parties may create and sign a basic term sheet before moving on to the Letter of Intent.
3. LOI (Letter of Intent): Next, parties draft and exchange a Letter of Intent (LOI), outlining key terms and setting the stage for further negotiations. Escrow is often opened at this stage, with any agreed upon deposit.
4. Due Diligence: Following the LOI, the buyer conducts formal due diligence to assess the business’s assets, liabilities, and other critical factors.
5. Purchase Agreement and Closing Documents: Upon completion of due diligence, parties finalize the Purchase Agreement, detailing the terms and conditions of the sale. The full set of “Closing Documents” often contain separate agreements related to the purchase and sale agreement, which might include a noncompete agreement, promissory notes, lease assignments and/or consulting or employment agreements.

Real Estate Transactions:

1. NDA: While NDAs are not standard in real estate transactions, they are not unheard of especially if the real estate is being sold subject to a business interest or if the property or the parties to the transaction require a higher degree of privacy.
2. LOI (Letter of Intent): Similarly, real estate transactions often commence with a Letter of Intent (LOI), outlining proposed terms and conditions.
3. Closing: Upon agreement on terms outlined in the LOI, parties proceed directly to closing, where legal documents are signed, and ownership transfers.
4. Due Diligence: During real estate transactions, the due diligence period typically starts as soon as the buyer and seller accept the Purchase and Sale Agreement – and the buyer has made a deposit. During this contingency period, the buyer, with the help of their agent, collects all the information about the property to help make a final decision about whether the buyer will proceed with the transaction.

Why It Matters:

Understanding the correct sequence is crucial for several reasons:

1. Efficiency: These orders for the different transaction types are designed to streamline the process, saving time and resources for all parties involved.
2. Risk Management: Proper due diligence at the right stage mitigates risks and facilitates informed decision-making.

The Benefits of Well Ordered Transactions and the Pitfalls of Misunderstanding:

Parties and advisors with less experience in business sales may inadvertently opt apply real estate transaction sequences to business acquisitions, leading to potential pitfalls for both buyers and sellers. Unlike real estate transactions, business sales typically involve greater complexity, with numerous moving parts and a lengthier set of closing documents. Consequently, for example, conducting due diligence after closing in a business sale may cause both parties to incur unnecessary legal expenses, such as drafting detailed purchase and sale agreements, exhibits, and closing documents in the event the transaction is terminated during due diligence for any reason. These expenses could have been avoided if the parties had postponed due diligence until after the buyer’s assessment.

In contrast, the real estate closing sequence prioritizes a faster closing with streamlined documents, better suited for less complex transactions in the real estate realm.

In conclusion, understanding the distinct sequences of business purchases and sales versus real estate transactions is essential for navigating these processes successfully. By leveraging legal expertise tailored to each transaction type, parties can ensure efficiency, mitigate risks, and achieve mutually beneficial outcomes. At Coepio Legal we have extensive experience in business and real estate transactions and invite you to schedule a consultation today.