Acquiring a Business? Here’s a Comprehensive Guide to Craft an Airtight Purchase Agreement
When buying or selling a business, few steps are as crucial as drafting the purchase agreement. This legally binding contract formalizes the transfer of ownership and protects both parties during the transaction. Whether you call it a “Business Purchase Agreement”, “Asset Purchase Agreement”, or “Share Purchase Agreement”, taking the time to get it right is essential. Let’s walk through what needs to be included to make it enforceable and airtight.
What exactly is a business purchase agreement?
A Business Purchase Agreement is a legal contract for buying or selling a business. It transfers ownership from the current owner to a new buyer. These agreements go by different names—you may see them called Purchase of Business Agreements or Business Sale Contracts. But they all serve the same purpose, that is to finalize the sale of a business.
Business Purchase Agreements can be used for many kinds of transactions. You can use them to buy or sell sole proprietorships, partnerships, corporations, LLCs, and other business entities.
The agreement outlines the terms and conditions for transferring the business to new ownership. It provides legal protections for both the buyer and seller during this transition process.
Types of Business Purchases Covered by Purchase Agreements
Business purchases involving the sale of assets or the sale of all shares might be covered by a business purchase agreement. Selling assets as opposed to selling shares may have tax ramifications. If you’re unsure which is best for you, consider consulting with our legal professionals for guidance.
Asset Sales:
With an asset sale, you’re selling off the valuable possessions or properties of a business. But the business itself, as a legal entity, stays intact. Any type of company can sell assets this way – sole proprietorships, partnerships, corporations, LLCs, you name it.
Examples of assets that are sold can include:
- Physical things like buildings, equipment, inventory, confirmed sales orders, business contracts
- Intangible assets like client lists, trademarks, intellectual property, company goodwill
- Data and records like books, files
When selling assets, you get to pick and choose what gets included in the sale. For instance, you can exclude cash, securities, bank balances, records of certain assets, and accounts receivable from the Business Purchase Agreement if you want. Also, with an asset sale, the business itself doesn’t get transferred – just its possessions. So the original business might keep its name, liabilities, tax ID and filings even after the sale. You’re only buying a piece of the business, not taking over the whole thing.
It’s important to know that business assets aren’t legally transferred to the new owner without a proper Business Purchase Agreement signed by both parties. The agreement formally executes the asset transfer and sale. Without it, the assets wouldn’t officially change hands.
The agreement outlines exactly what assets are included, what’s excluded, the purchase price, and other terms and conditions. This provides legal protection for both the buyer and seller during the transition.
Sale of shares:
For incorporated businesses, ownership is represented by shares of stock. So with a corporation, you can sell the business by having the shareholders sell all their issued shares to the buyer.
Selling shares transfers everything – the whole corporation changes hands from seller to buyer. This includes all assets like inventory and real estate, all rights like copyrights and trademarks, and all obligations like debts and liabilities. Essentially, the buyer takes over the entire incorporated business lock, stock, and barrel when buying up all the issued shares.
Now, shareholders don’t have to sell off all their shares. If they want to keep some ownership in the company, they can use a Share Purchase Agreement to transfer only a portion of the corporate stock to the buyer. But when they want to hand over the reins completely and sell the entire incorporated business, issuing all shares to the purchaser does the trick.
Essential Components for Crafting an Airtight Purchase Agreement
Identify all parties upfront
When drafting any legal agreement, whether it’s for buying a business or assets or any other purpose, you always need to clearly identify who the parties to the contract are. This is true regardless of whether the parties are actual people or corporations. The identities of everyone entering into a binding legal contract must be spelled out.
Describe the Business Concisely
When drafting a business purchase agreement, it’s crucial to include a detailed description of the business being sold. This typically involves providing the registered legal name of the business, a brief overview of the main products/services it provides, and the geographic region where it conducts operations. The goal is to clearly identify the specific business entity that is being transferred from the seller to the buyer.
Outline Financial Terms and Price
Any time a business is being officially sold or purchased, the financial terms are a critical part of the agreement that need to be clearly spelled out. This includes specifying the total purchase price for the business, as well as who will be responsible for legal fees and any other costs associated with the sale. Both the buyer and seller need to agree upfront on the full financial picture – whether that’s the overall price, how it will be paid, the timeline for payment, and how ancillary expenses will be handled. Leaving any of those financial matters vague or unaddressed can create major problems down the road. So it’s crucial that the business purchase agreement lays out all the monetary specifics in plain, unambiguous language so both parties fully understand the economic parameters of the deal.
List All Inclusions and Exclusions of Assets & Liabilities from the Sale
On the surface, businesses may appear straightforward, but there are often complexities around their assets and liabilities that need to be addressed in the purchase agreement.
Specifically, the seller may want to exclude certain assets from the sale, or the buyer may not want to take on certain debts. In these cases, the contract should clearly detail which assets are included or excluded, and which liabilities the buyer is willing to assume.
If there are a large number of items to note, it’s common to put them in an addendum referenced in the main agreement. For example, the contract would state “The assets included and liabilities excluded from the sale are noted in Addendum A,” with the details then spelled out in that attached document.
Properly detailing assets and liabilities prevents misunderstandings later. Even if a business seems simple, the purchase agreement needs to cover the financial specifics thoroughly.
Specify the Ownership Transfer Process
When acquiring a business, an important part of the purchase agreement is outlining the transfer of ownership from the seller to the buyer. This includes specifying how and when the business’s name registration will be changed to reflect the new ownership.
Additionally, if the business has financed assets or equipment, a separate asset purchase agreement is often needed to detail the timeline and process for transferring title of those items to the buyer. This ensures a clear handoff of all physical assets involved in the sale.
Proper transfer of all registered names, titles, and deeds should be addressed upfront in the purchase contracts. Clarifying the legal transfer of ownership helps ensure a smooth transition when the business changes hands. Taking the time to work out these details prevents headaches for both parties down the road.
Address Third-Party Brokers
When a business broker or M&A advisor is involved in a sale or acquisition, their compensation and terms of service should be addressed in the purchase agreement. Often brokers require that their commission fees and payment schedule are contractually agreed to by both parties upfront. This ensures the broker is properly compensated per the conditions of their separate advisory agreement when the transaction is completed.
The purchase contract should outline how and when the broker will be paid their success or retainer fees. This avoids any confusion down the road about the amount owed or who is responsible for payment. Making the broker’s terms clear to both buyer and seller early on and including them formally in the purchase agreement leads to a smooth process for all parties involved. It’s important not to overlook agreeing to the broker’s compensation in writing.
Outline Closing Procedures and Timelines
Selling a business is a major endeavor, and the seller typically needs ample time to prepare for the transition to new ownership. The purchase agreement should outline specifics to facilitate the closing process, such as:
- The exact date and time when the sale will be finalized. The transfer becomes effective at this deadline.
- Logistical details on where and how closing will take place. Will documents be signed in person, remotely, or delivered through intermediaries?
- Any transitional support the buyer requires from the seller post-close. For example, the buyer may want the owner to stay on temporarily to assist with operations, introductions to key contacts, etc.
Spelling out the closing protocols and any transitional support expectations in detail reduces confusion down the road. The seller needs to know what the final handoff will entail and how to prepare. Defining closing procedures and ongoing assistance in the contract keeps the transfer smooth and orderly for both parties.
Contingencies that Must be Met Before Closing
When acquiring a business as an ongoing entity, the buyer depends heavily on information provided by the seller regarding finances, operations and so on.
The contract sections on representations and contingencies are crucial for spelling out key details and the buyer’s requirements to complete the deal. For example, the buyer may make the purchase contingent on verifying past financial records or prohibiting the seller from starting a competing business.
Other contingencies that protect the buyer may include:
- Reviewing leases, contracts, and licenses
- Ensuring employee retention
- Confirming intellectual property ownership
- Obtaining lender financing
Clearly stating the buyer’s representations and contingencies allows the seller to understand the conditions required for closing. It also protects the buyer by letting them validate key information before finalizing the substantial purchase. Thoroughly addressing contingencies in the agreement avoids misunderstandings.
Include Warranty clauses for Restrictions
- Non-compete – The seller agrees not to start or work for a competing business for a specified period of time after the sale. This protects the value of the purchaser’s acquisition.
- Non-solicitation – The seller agrees not to poach employees from the purchased business for a certain time period post-sale. This maintains stability of the new owner’s workforce.
- Confidentiality – Both parties agree not to disclose any proprietary information learned during negotiations or due diligence. This protects trade secrets and competitive data.
- Environmental compliance – The seller affirms the business complies with environmental regulations and that no hazardous spills or issues exist that could create future liability for the buyer. Provides risk protection.
Clearly outlining these essential restrictions in the contract provides the purchaser with assurance on critical aspects when acquiring a business. It also ensures that the seller understands their obligations after the transition takes place.
Secure proper Signatures of the Parties to Execute
Signatures are critical for legal contracts like a business purchase agreement to take effect. Typically both the selling owner and buying party will sign and date the document to make it binding.
It’s also common to have one or two witnesses sign as well, along with their location noted. Depending on the situation, the contract may also get notarized or include the stamp of the attorney overseeing the transaction. And of course, once fully executed with all necessary signatures, both parties will receive a copy of the signed version for their records.
Properly signing a business purchase agreement or asset sale contract is essential to formalize the transfer of ownership. All parties involved should review the document carefully before adding their signatures, as their signatures make the contract valid and enforceable. Taking the time to ensure proper signing avoids issues down the road.
Why is it advisable to hire an experienced attorney to craft your Purchase Agreement?
Our Attorney has experience in contract law and deep understanding of technical details and language required for an enforceable agreement. They know how to craft clauses and terms in a way that holds up legally. Doing it yourself risks critical gaps or loopholes.
Further, our Attorney brings negotiation tactics to ensure you get favorable terms. They know how to navigate compromises while protecting core needs. We keep up with the latest regulations and laws impacting business sales in your state or industry. We know the field’s specific quirks and requirements. The purchase agreement is critical not to have proficient legal guidance. Bringing specialized skills and objectivity, an Attorney provides you peace of mind that your interests are secured.
Premier Legal Solutions LLC provides thorough legal advice on all facets of creating a Business Purchase Agreements. We aim to assist business owners in navigating this legal route with confidence and simplicity. Contact us at 267-245-0649 or email us at info@1lawyer.com to schedule a consultation and take the first step in securing your company’s future.