One of the most common misconceptions buyers and sellers bring to a small business transaction is that it involves a handful of agreements, a handshake, and a wire transfer. In reality, acquiring or selling a business valued between $3 million and $10 million is one of the most legally complex transactions a private individual will ever undertake. The document count, the sequencing, and the number of decisions required before a definitive purchase agreement is even drafted routinely surprise first-time buyers and sellers alike.
Here is what the process actually looks like, and where it most commonly goes wrong.
Most buyers underestimate how much happens before the purchase agreement
The purchase agreement is the document that closes the deal. But in a typical small business acquisition, it is nowhere near the first document signed, and it cannot be properly drafted until a significant amount of work is done upstream.
Before the purchase agreement, there is usually at least one letter of intent. In more complex deals, there may be several. A buyer may submit an LOI, conduct preliminary due diligence, discover issues that change the valuation, and need to renegotiate terms before a revised LOI is issued. A seller fielding interest from multiple buyers may receive and evaluate competing LOIs at different price points and on different terms before selecting a counterparty and entering exclusivity. Each LOI requires review, negotiation, and in some cases redrafting before the parties can move forward.
In a recent matter handled by our firm, a business owner selling a professional services company went through two separate LOIs with two different prospective buyers before reaching terms that could support a definitive agreement. The first LOI fell apart during due diligence when financing contingencies could not be resolved. The second required significant renegotiation of price and structure before the parties were aligned. Neither buyer had anticipated that the process would involve that level of iteration, and neither had initially budgeted the time or legal costs accordingly.
The seller’s entity must be in order before closing
A buyer is not just acquiring a business. In most cases, they are acquiring an entity or its assets, and that entity must be properly organized and in good standing before the transaction can close. This is an area that consistently creates delays and unexpected costs.
For a Texas LLC, the operating agreement must be reviewed to confirm there are no transfer restrictions, buy-sell provisions, or member consent requirements that could block or complicate the sale. If the operating agreement is outdated, missing, or does not address the sale of the business at all, it needs to be amended or replaced before closing. Member or manager resolutions authorizing the transaction must be properly adopted and documented. If the entity has multiple owners, all of them must consent to the sale in the manner required by the operating agreement and Texas law.
If the entity being acquired was recently formed specifically to facilitate the transaction, the formation documents, operating agreement, and initial resolutions all need to be drafted from scratch and properly executed before the deal can proceed.
Due diligence is not a checklist, it is a process
At the small business level, due diligence is often informal on the seller’s side, which is precisely what makes it risky for the buyer. There is rarely a data room. Documents are assembled on request, sometimes incompletely. Financial statements may not be audited. Tax returns, contracts with key customers, employee agreements, and lease documents may surface gradually over weeks rather than in a single organized production.
What buyers are looking for goes beyond the financials. Unpaid taxes and undisclosed liabilities, contracts that cannot be assigned to a new owner without third-party consent, customer concentration risk where one or two clients represent the majority of revenue, key employees who are not bound by non-compete or non-solicitation agreements, and regulatory licenses that are tied to the individual seller rather than the entity are all issues that can materially affect the value of the deal or kill it entirely.
Due diligence findings frequently lead back to the LOI. If a buyer discovers during due diligence that the business carries liabilities not reflected in the original offer, the price and terms need to be renegotiated before the purchase agreement can be drafted. That renegotiation may produce a revised LOI, an amendment to the existing one, or simply a revised term sheet. Any of those outcomes adds time and cost to the process.
Asset purchase vs. stock purchase
Most small business acquisitions in Texas are structured as asset purchases rather than stock purchases. In an asset purchase, the buyer acquires specific assets of the business (equipment, contracts, customer lists, intellectual property) rather than the legal entity itself. This generally gives the buyer more protection from the seller’s existing liabilities. In a stock purchase, the buyer acquires the entity and steps into its full legal and financial history. Understanding which structure is right for the deal affects everything from tax position to what warranties the seller must provide, and it is a decision that should be made with both legal and tax counsel before the LOI is signed, not after.
Seller financing is common and adds documents
Unlike large corporate acquisitions, small business deals in Texas are frequently seller-financed, meaning the seller receives part of the purchase price over time rather than all at once at closing. This arrangement requires a promissory note, a security agreement, and often a personal guarantee from the buyer. Each of these is a separate legal instrument that must be negotiated and drafted. Buyers need to understand what happens if the business underperforms after closing, and sellers need to understand what recourse they have if the buyer defaults.
Closing is not the finish line
After closing, there are practical and legal steps that are often overlooked: notifying vendors and customers, transferring licenses and permits, updating contracts and accounts, completing required state filings, and satisfying any post-closing conditions in the purchase agreement. Deals in Texas may also require assignment of commercial leases, which requires landlord consent and can delay or complicate closing if not secured early.
By the time a small business acquisition closes, the document count typically includes one or more letters of intent, a due diligence checklist and response package, entity formation or amendment documents, member or manager resolutions, a purchase agreement, a bill of sale, assignment agreements for key contracts, a promissory note and security agreement if seller financing is involved, and various closing certificates and filings. That is before any ancillary documents specific to the business or the deal structure.
Buyers and sellers who walk into the process expecting two or three agreements consistently find themselves unprepared for the timeline, the cost, and the decisions required. Engaging experienced legal counsel before the first LOI is signed is not a luxury in a small business acquisition. It is the most reliable way to avoid surprises that derail deals or create liability after they close.
Filippov Law Group, PLLC advises buyers and sellers throughout Texas and Utah at every stage of the acquisition process, from reviewing and negotiating a first LOI through entity preparation, due diligence, purchase agreement drafting, and closing. Contact our Houston office at (832) 305-5529 or submit an inquiry at filippovlaw.com/contact to schedule a consultation.