Purchasing a business is a legal process that requires a binding business purchase agreement. A business purchase agreement is a legal contract that transfers ownership of a business or business entity from a seller to a buyer.
A business purchase agreement can come in the form of a stock purchase agreement or asset transfer agreement and contains details governing the sale's terms.
A well-drafted, clear and accurate business purchase agreement will protect the current business owner, new buyer, and any other parties who might have an interest in the agreement.
Below are 9 things to include in a business purchase agreement.
1. Identification of Parties
No matter what kind of legal contract you create – whether it’s a master purchase agreement, asset purchase, or something else- all parties must always be identified. This applies whether the parties are natural people or corporations.
Usually, each party will also be identified by a shorthand term like seller or buyer, simply to make the contract easier to read. But, again, these will be defined when the parties are identified.
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2. Business Description
A business purchase agreement needs to include a description of the business. This will usually include the registered business name, a short description of what it does, and where it operates.
3. Financial Terms
Of course, whenever someone agrees to sell or buy a business officially, the financial terms of the agreement need to be included. This can consist of the business purchase agreement cost, legal fees and who will be responsible for them, and any other financial matters relating to the sale.
4. Assets & Liabilities Included and Excluded from the Sale
Businesses might seem like simple things, but they’re very complex and have many different parts, including assets and liabilities.
Sometimes, a business owner wants to exclude a particular asset or assets from the sale process. Or the new buyer might stipulate that they do not want to be liable for any debts the business has.
The purchase agreement should include all of these financial inclusions and inclusions. Sometimes, if there is a long list of items, this might be included as an addendum to the purchase and sale agreement.
In that case, the applicable addendum number will be noted in the section dealing with this part of the agreement.
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5. Transfers
When you buy a business entity, you must transfer ownership of that business from the original owner’s name to your own. The business purchase agreement should include details of how this will be done.
If the business has financed assets, you might also need an asset purchase agreement that outlines how and when the transfer of those assets will be transferred.
6. Third-Party Brokers
Sometimes, businesses use third-party brokers to manage the sale or purchase of a business. Those brokers may have terms and conditions that must be included in the legal contract to ensure that they are honored when the sale is completed.
Usually, this relates to commissions and other kinds of payments.
7. Closing Date, Time, and Logistics
Selling a business is an enormous undertaking, and usually, the owner needs a lot before they can transfer the business to the new buyer.
This will usually be outlined in the section with details such as:
- The closing date
- The closing time
- Closing logistics
Sometimes, the new buyer might require assistance from the owner or key staff members as they are getting used to running the company. These kinds of terms might also be included in this section of the business purchase agreement.
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8. Warranties, Representations, and Contingencies
When someone buys a business as a going concern, they are relying on the information provided by the seller in terms of revenue, profit, and other information.
The warranties, representations, and contingencies section of the business purchase agreement and asset purchase agreements will detail this information and provide details of any requirements the new buyer or owner may have to move the sale forward.
For instance, a new buyer may make an offer to buy a business contingent on reviewing their financials for previous years before the sale is finalized to ensure that they are paying fair market value for the business.
Or they may purchase the business contingent on the owner not starting another business in the same industry in any location that the business for sale currently operates in.
9. Signatures of the Parties
For any legal contract or business purchase transaction to be binding, it must be signed. The owner selling the business and the new buyer need to sign and date the document.
These contracts will usually also be signed by one or more witnesses and typically include their location. Some documents might also be notarized or stamped by the attorney handling the sale, and each party will usually get a copy o the signed document.
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