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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.
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