Business Purchase Agreement: Steps to Consider and What to Include

What is a Business Purchase Agreement?

A business purchase agreement, also called a “BPA,” is a legal contract between a buyer and seller, where the buyer acquires the ownership of a business entity (typically both assets and liabilities) from the seller for a certain price. The agreement specifies the legal and business terms for buying the business entity and governs the transfer of ownership.

This agreement is essential for anyone buying or selling a business, as it establishes transparency and clear obligations for both parties during the transaction. Depending on the structure of the deal, a BPA can be set up as either a stock purchase (entity purchase) or an asset purchase (acquiring only the assets).

During a business acquisition, business purchase agreements safeguard the rights of both parties. They provide a legal framework, transparency, and clear obligations for both parties during the transaction.

Note, business purchase agreements can be set up as either a stock purchase (entity purchase) or asset purchase (only buying the assets from a business), depending on how the deal is set up between the buyer and seller.

What’s Included in a Business Purchase Agreement?

Buyers and sellers must adhere to a specific legal process when selling a business. Business purchase agreements initiate the legally binding purchase of a company after receiving a letter of intent. This type of agreement requires the buyer to purchase the business per the agreement’s terms and conditions.

Although business purchase agreements are complex, they generally contain several standardized provisions. The most vital element to remember is that while it’s best to leave contract drafting to a lawyer, it’s not a bad idea to establish a basic working knowledge of the terms.

• Party Identification: This provision appears at the beginning of the business purchase agreement. It contains the legal names and contact information for the seller and buyer. Ensure you identify all parties correctly since legal complications can result otherwise.
• Business Description: Detail an overview of the company and its operations in this provision. It should contain a statement attesting to the seller’s legal authority to authorize the sale, as well as other legal representations and warranties.
• Financial Terms: This provision includes the purchase price, any deposits required by the seller, and the date and time of the transfer.
• Sale: It is critical to define the type of sale in this section and the assets included and excluded from the sale. This provision will also include a section on property transfers detailing the condition and value of assets, such as equipment, tools, and property.
• Covenants: This provision details the seller’s obligations surrounding the closing, including taxes, loans, fees, benefit transfers, and salaries. You can use this section to list buyer and seller agreements and protective clauses, such as a non-competition agreement.
• Transfers: The buyer and seller require a clear understanding of who handles what, including the seller’s role, new employee training, and customer obligations. You can also detail the need for a bill of sale finalization to serve as the transaction’s conclusion.
• Third-Party Brokers: If third-party brokers were used, this provision should include the legal names and contact information for those intermediaries and the party responsible for broker compensation.
• Closing: This section of the business purchase agreement is typically straightforward as it addresses logistics, the closing date, and time. Additionally, it executes title transfers and specifies the money to be paid at closing.
• Representations and Warranties : Representations and warranties are promises made by the seller about the business being sold. These promises can include statements about the business’ assets, liabilities, financials, and operations. The point of this section is to give the buyer assurances as to what they are buying.
• Indemnities: The indemnities section outlines any obligations one party would have to another to compensate or ‘indemnify’ the other party for certain losses, damages, or liabilities that may arise after the transaction is complete. Indemnities are designed to protect both the buyer and seller from any unforeseen events or misrepresentations.
• Dispute Resolution: The dispute resolution clause provides both the buyer and seller a procedure and means to address any sort of dispute that may transpire as a result of the transaction. It is always smart to outline how disputes are addressed in any type of business transaction, so that both parties understand their options and means beforehand.

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Due Diligence Requirements

Before signing a business purchase agreement, both the buyer and seller must conduct thorough due diligence to ensure a transparent and legally sound transaction. The due diligence process includes:

• Financial Audits: Buyers should comprehensively review the seller's financial statements, tax records, and accounts payable/receivable. This step helps identify any hidden liabilities or financial risks.
• Legal Compliance Checks: Confirm that the business complies with all relevant laws and regulations. This may include checking permits, licenses, and any pending litigation that could impact the sale.
• Operational Review: Buyers should examine the company's operations, including contracts with vendors, employment agreements, and intellectual property rights, to assess the value and potential issues.

Conducting due diligence protects both parties and provides the buyer with confidence in the business they are acquiring.

Steps to Consider For a Business Purchase

Yes, a buyer can back out of a business purchase agreement before signing. Until the buyer signs it, they can legally back out of the agreement you have with them. When ready to purchase your business, buyers must complete preliminary steps before signing the purchase agreement, which will safeguard you both in several ways.

Here are a few steps for discouraging this situation from arising:

1. Require a Letter of Intent. Letters of intent are legal documents summarizing the proposed business purchase agreement terms, including the purchase price, due diligence terms, and deposit amount. Buyers typically draft their own documents and submit them to you for approval. This action shows their serious intent to purchase the business, so sellers should request one from buyers.
2. Request for a Deposit. Letters of intent are not legally binding, nor do they guarantee that a sale will occur. It ensures that the seller will not advertise their business for sale during ongoing active negotiations, and you can require them to pay you a deposit during this time. However, if the negotiations do not result in a purchase agreement, you will refund the buyer’s deposit.
3. Discuss Financing. A signed letter of intent allows buyers to present a sincere interest in the business for capital lending. They may also submit the letter to their lawyer when determining if the terms are fair when acquiring your business. In general, a letter of intent is more beneficial to the buyer than to the seller.
4. Incorporate a Confidentiality Agreement. A letter of intent should include a confidentiality clause prohibiting the buyer from using or disclosing your information to a third party if the sale does not happen. This protection is the best option for a seller while attempting to secure a purchase agreement with a buyer.

The only genuine concern you should have during these negotiations is maintaining the confidentiality of your business’s sensitive information. Given that the buyer will be performing due diligence and examining your company’s financial and customer information, you don’t want them to walk away from the deal and then use this information for financial gain.

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Common Pitfalls in Business Purchase Agreements

When drafting or signing a business purchase agreement, it’s crucial to avoid common mistakes that could lead to disputes or financial losses. Here are some key pitfalls to be aware of:

• Lack of Clarity on Asset Inclusions and Exclusions: Failing to clearly specify which assets are included or excluded from the sale can lead to misunderstandings and potential legal battles.
• Inadequate Due Diligence: Skipping or rushing the due diligence process might result in overlooking critical liabilities or compliance issues, putting the buyer at risk.
• Ambiguous Terms: Vague language, especially regarding financial terms, payment schedules, or obligations, can create confusion. Ensure all terms are clear and detailed.
• Ignoring Post-Agreement Obligations: Not accounting for the obligations each party has after closing (such as training responsibilities or customer transitions) can cause operational and financial setbacks.

Being aware of these pitfalls can help parties mitigate risks and ensure a smoother business acquisition process.

Can I Write My Own Business Purchase Agreement?

Yes, you can technically write your own business purchase agreement since there are no laws against doing so. However, many of the available free and premium templates online were written for another business or general situation. Please consult with an attorney first since they can tailor an agreement for your exact business needs while avoiding all legal mistakes.

Why Hire a Lawyer for Business Purchase Agreements

The following are some advantages of hiring a legal counsel for business purchase agreements:

• Applies Legal Knowledge: Lawyers focusing on contract law are well-versed in the intricacies and needs of business purchase agreements. To guarantee that the contract conforms with all relevant rules and regulations, they can draft, evaluate, and negotiate it.
• Mitigates Risk: Attorneys can assist in identifying potential risks and liabilities related to the acquisition of a business. They can create provisions like indemnification clauses, representations and warranties, and dispute resolution systems that safeguard the interests and reduce risks.
• Supports Negotiations: Attorneys can bargain for favorable terms and circumstances on your behalf. They can help comprehend the significance of certain clauses and offer suggestions on whether to accept, reject, or amend particular words.
• Offers Customization: A lawyer can modify the contract to meet the needs and goals since every business acquisition differs. They can ensure that the agreement accurately reflects the individual's wishes and safeguards the interests.
• Resolves Disputes: If a dispute arises between the parties, the early involvement of a lawyer can aid in facilitating resolution through formal legal processes or, if necessary, through negotiation.

Types of Business Purchase Agreements

The following are the different types of business purchase agreements:

• Asset Purchase Agreement : In an APA, the seller's corporate entity is left behind as the buyer takes over certain business assets and obligations, such as inventory, equipment, client lists, and contracts. This kind of contract lets the buyer select the assets and obligations they want to take on.
• Stock Purchase Agreement : A SPA entails the acquisition of all or the majority of the seller's ownership stakes in the company. Ownership of the entire business, including its contracts, liabilities, and assets, is transferred under this agreement.
• Merger Agreements : It combines two independent businesses to create a new organization. One company may acquire the other through an acquisition or a merger of equals. The merger's terms and circumstances, including how shares will be handled, the organization of management, and other crucial information, are laid out in the agreement.
• Membership Interest Purchase Agreement : It is utilized when an LLC ( Limited Liability Company) is the target of the acquisition. Like a stock purchase agreement, the buyer can buy membership interests or ownership holdings in the LLC.
• Joint Venture Agreement : This contract is utilized when two or more parties join forces to create a new legal organization for a particular goal or activity. Each party's contributions, obligations, and profit-sharing arrangements are described in this agreement.
• Partnership Buy-Sell Agreement : This contract is frequently used in partnerships to set up a structure for purchasing or selling ownership interests in the partnership in the case of certain triggering circumstances, such as the retirement, demise, or withdrawal of a partner.
• Franchise Agreement : When shopping for a franchise, the buyer and the franchisor enter right into a franchise settlement. The terms and circumstances of the franchise, such as costs, branding, and operational rules, are defined in this settlement.

Protecting Your Business with the Right Purchase Agreement

A well-drafted business purchase agreement is crucial for ensuring a smooth and legally secure business acquisition. It establishes transparency, defines the rights and responsibilities of each party, and helps minimize the risk of disputes. Whether you’re buying or selling a business, investing the time to understand the essential components of the agreement and conducting thorough due diligence can protect your interests.

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