Written by Live Oak Bank
The Basics of a Business Purchase Agreement
During the sale of a business, both the seller and buyer must follow a certain legal process. After signing a letter of intent and completing due diligence, a business purchase agreement marks the official start to the legally binding transaction of a business. This agreement requires the buyer to purchase the business according to the terms and price outlined in the agreement. These documents can be lengthy and full of legalese, which is why an experienced attorney should create the purchase agreement.
Purchase agreements are complex but typically have several standard sections. The biggest takeaway on purchase agreements is this: while it’s ideal to let an attorney handle the terms and conditions it’s not a bad idea to have a general understanding of each section, as we’ve outlined below. Both parties should understand what they’re signing, so leverage your professional team to help you translate some of the legal jargon and technical language.
This section appears at the beginning of the purchase agreement and lists the legal names of the seller and buyer, as well as their contact information.
Description of Business
All aspects of the business are outlined here, including the location and purpose of the business, the services and products of the business, the business entity, management systems and structure, financial summary and overview of target customers. This section also includes a statement verifying the seller’s legal right to authorize the sale as well as additional legal representations and warranties.
It’s critical to define the type of sale, along with assets included and excluded from the sale in this section. Potential assets included could be equipment/machinery, fixtures, inventory, accounts recoverable and lists of customers and goodwill. Potential assets excluded could be cash, company vehicles, real estate and more. This section of the business purchase agreement will also have the transfer of property, with the seller’s “Agreement to Sell” and the buyer’s “Agreement to Buy.”
This section of the business purchase agreement outlines the provisions that the seller is responsible for covering before and after the closing, such as tax liabilities, loan obligations, third-party fees, transferring employee benefit plans and employee salaries. This is also where buyer and seller agreements can be listed, including protective clauses like non-compete, confidentiality, intellectual property, non-solicit and indemnification agreements.
After the transaction closes, both buyer and seller need a solid understanding of who’s responsible for what including the seller’s role in the business after the sale (if any), who’s on the hook for training new employees and who will be notifying customers that the sale has transpired.
Participation or Absence of Brokers
If third-party brokers were used in the transaction, this section of the business purchase agreement covers the legal names and contact info of those facilitators, as well as the party responsible for paying the broker.
This section of the business purchase agreement is usually straightforward, as it covers the logistics, date and time of closing. It also issues title transfers and outlines what money will be paid upon closing.
Any number of additional documents can be attached to this section of the business purchase agreement including letter of intent, financial statements, valuations, buyer/seller resumes, marketing plans and vendor agreements.
While this summary of the fundamental sections of a purchase agreement covers the basics, it is not the complete list of the process. Both buyers and sellers should be aware of the full scope and the importance of having a solid team in place throughout the transaction cannot be overstated. An attorney, plus an accountant and a broker (if applicable) will be key players in not only understanding the purchase agreement but making any necessary negotiations.