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Business purchase agreements are the best legal documents to use when buying and selling a business. More importantly, they outline the terms and conditions associated with the transaction and allow for a meaningful fair market valuation of all company assets and liabilities. However, poorly written agreements can fail to serve their intended purpose and result in unwanted legal consequences for either party.
This article defines business purchase agreements, what they include, what businesses use them, and more.
What is a Business Purchase Agreement?
Business purchase agreements , also called BPAs or business transfer agreements , are legal contracts that transfer ownership from the seller of a business entity to a buyer. This type of agreement contains provisions that govern the terms of sale.
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.
Term 1. 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.
Term 2. 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 .
Term 3. Financial Terms
This provision includes the purchase price, any deposits required by the seller, and the date and time of the transfer.
Term 4. 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.
Term 5. Covenants
This provision details the seller’s obligations surrounding the closing, including taxes, loans, fees, benefit transfers, and salaries. Additionally, you can use this section to list buyer and seller agreements and protective clauses, such as a non-competition agreement .
Term 6. Transfers
The buyer and seller require a clear understanding of who is responsible for 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.
Term 7. 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.
Term 8. 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.
Term 9 Warranties
Warranties offer that the premises and equipment comply with applicable government codes and regulations as of the closing date and that all taxes have been paid. This strategy ensures that the buyer and seller enter into a good-faith transaction.
Who Should Use a Business Purchase Agreement?
Anyone buying or selling a business should use a business purchase agreement. This legally binding document outlines the terms of the transfer that protect both parties’ rights under local, state, and federal rules.
More Than a Business Purchase Agreement
Although the transaction is referred to as a business purchase, it may be more accurate to refer to it as a business asset and liability purchase . A transfer cannot be accomplished simply by stating that the seller is transferring all rights to the buyer.
Accurately Detail Asset Transfers
Sellers transfer the various assets, liabilities, and goodwill acquired by the company over time under a business purchase agreement. This assertion is true regardless of the business’s organizational structure. The business purchase agreement must include a detailed list of the transferred assets and liabilities.
This web page discusses asset purchase agreements.
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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.
Can a Buyer Back out of a Business Purchase Agreement?
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:
Step 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 indicates their serious intent to purchase the business, so sellers should request one from buyers.
Step 2. Request 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.
Step 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.
Step 3. 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.
Get Legal Help from Acquisitions Lawyers
Do you need legal advice drafting business purchase agreements? If so, a legal professional in your area can help. Start accepting proposals from acquisitions lawyers today to connect with someone who can help.
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Meet some of our Business Purchase Agreement Lawyers
I have been practicing law for 35 years. In addition to my law degree, I hold an MBA. I've created six companies, currently act as outside counsel to another 12, and have been an advisor to more than 500 startups and entrepreneurs.
I am a licensed and active Contracts Attorney, with over 20 years of diverse legal and business experience. I specialize in reviewing, drafting and negotiating contracts. My practice is insured, and focuses on business agreements; working with individuals and international brokerage firms in assisting clients with the sale and/or purchase of their ecommerce businesses; breach of contract issues, contract disputes and arbitration. I am licensed to practice in New York and Connecticut, and am a FINRA and NCDS Arbitrator. My experience includes serving as General Counsel to small businesses. This entails reviewing, updating and drafting contracts such as employments agreements, asset purchase agreements, master services agreements, operating agreements and a variety of business and commercial contracts. Additionally, I assist clients with business strategies, contract disputes and arbitration. My diverse experience allows me to give my clients a well-rounded approach to the issues they face. I have been at top AML law firms; a Vice President at an Investment Bank, a Civil Court Arbitrator presiding over cases in contract law, commercial law, a Hearing Officer, presiding over cases and rendering written decisions, and a Judicial Clerk to a Civil Court Judge. It would be a privilege to assist you and your business with my services.
Carlos Colón-Machargo is a fully bilingual (English-Spanish) attorney-at-law and Certified Public Accountant (CPA) with over twenty years of experience. His major areas of practice include labor and employment law; business law; corporate, contract and tax law; and estate planning. He is currently admitted to practice law in Georgia, Florida, the District of Columbia and Puerto Rico and currently licensed as a CPA in Florida. He received a Master of Laws from the Georgetown University Law Center in 1997, where he concentrated in Labor and Employment Law (LL. M. in Labor and Employment Law) and a Juris Doctor, cum laude, from the Inter American University.
Graduate of Georgetown Law (J.D. and LL.M in Taxation) Injury Claims Adjuster before law school for top insurer Eight plus years of legal experience Past roles: Associate at premier boutique law firm in the DC metro area Policy Associate at a large academic and research institution Solo Practice Areas of Expertise: Contracts Business Formation Trusts and Estates Demand Letters Entertainment Transactions
As a business law attorney serving Coral Springs, Parkland, and Broward County, FL, Matthew has been recognized as “AV” rated, which is the highest rating an attorney can achieve through Martindale’s Peer Review system. Year after year Matthew is listed in the “Legal Leaders” publication as a top-rated attorney in South Florida in the areas of litigation, commercial litigation, and real estate. Matthew is also a graduate and instructor of the Kaufman Foundation’s FastTrac NewVenture Program, presented by the Broward County Office of Economic and Small Business Development.
John Benemerito is the Founder and Managing Partner of Benemerito Attorneys at Law. Admitted to practice in New York and New Jersey, John represents small business owners and startups in the areas of Business and Securities Law. John received his Bachelors Degree at John Jay College of Criminal Justice where he majored in Criminal Justice. Afterwards, he attended New York Law School where he focused his studies on Corporate and Securities Law. John comes from a family of entrepreneurs. From as far back as he can remember he was always involved in his family’s numerous businesses. At the age of fifteen, John entered into a new business venture with his father and managed to grow and maintain that business through high school, college and law school.John is currently a co founder in over five different businesses. After law school, John decided that he wanted to help people like himself. He opened his own law practice and began working primarily with small business owners until he was introduced into the startup world. Ever since that time, John has worked with hundreds of startups and thousands of entrepreneurs from all different backgrounds in helping them achieve their goals. Having been an entrepreneur his entire life, John understands what it takes to create and maintain a successful business. He enjoys sitting down and working with his clients in figuring out each of their unique challenges.
California-based small business attorney handling matters related to securities, mergers & acquisitions, corporate governance, and other business transactions.