In the acquisition process, a business purchase agreement serves as the foundation for much of what is to follow.
It is a legally binding document that sets out the agreement between the buyer and seller and can be used to ensure both parties are on the same page about the integral pieces of the puzzle.
Whether buying tangible or intangible assets, the purchase agreement for the business transaction defines the roles, expectations, and timeline of the transaction.
What Is a Business Purchase Agreement?
A business purchase agreement is a contract that governs the sale of a business. It lays out what is being sold, what is being bought, and how the sale will occur, giving the buyer and seller a full understanding of what to expect.
The agreement captures the terms of the sale, including the transfer of business assets and liabilities and the dates by which these things may happen. It protects both the buyer and the seller by ensuring all the terms of the sale are agreed upon and legally recorded.
Why Is a Business Purchase Agreement Important?
These agreements cover the necessary details of a sale in clear terms. It is an irreversible agreement that cancels out any uncertain outcome of the sale and clearly states the purchase price, the payment terms, and how the business assets will be handled.
In the case of a dispute or misunderstanding, the law will adhere to the terms written in the agreement. Both parties sign this legally binding document, which will be enforced accordingly.
Some of the benefits of having a well-drafted purchase agreement include:
- Transaction Clarity: The agreement defines precisely what is or is not included in the sale, such as real estate, equipment, intellectual capital, or intellectual property.
- Defined Responsibilities: Certain roles and responsibilities of both buyer and seller are defined.
- Legal Protection: In case of any disputes, the purchase agreement becomes the legal basis for settling any misunderstandings or violations of the contract.
Preliminary Steps Before Drafting a Business Purchase Agreement
Important steps should be taken before an actual purchase agreement is drawn up: the seller and the buyer should confirm they are committed enough to go through with the sale, whether the buyer is prepared financially, and how to protect sensitive information.
1. Request a Letter of Intent (LOI)
An LOI is a preliminary document that expresses the buyer’s ‘intention to purchase’ the business. It sets out the basic terms of the deal. An LOI confirms both parties are on the same page concerning the material terms of the deal before proceeding to a more detailed business sale agreement.
In this article, we talk more about LOIs.
2. Secure a Deposit
A deposit is a clear sign of the buyer’s commitment to proceeding. It’s usually a percentage of the purchase price of an object or a property. It essentially locks in the deal while the parties continue to negotiate.
3. Obtain Financing Pre-Approval
To minimize difficulties with the sale, the buyer should arrange for pre-approval of any necessary financing. This confirms the buyer’s ability to finance the purchase and gives peace of mind to the seller.
4. Implement a Non-Disclosure Agreement (NDA)
Ideally, both parties will also sign a non-disclosure agreement at this point. The NDA prevents any confidential information about the business entity from being revealed.
This includes:
- Finances
- Customer records
- Proprietary information
Learn more about critical details to include in NDAs here.
Core Components of a Business Purchase Agreement
Here are just a handful of the things that must be in a purchase agreement for a business to facilitate a successful sale:
1. Identify the Parties
The first part of the contract names the parties to the transaction: the buyer and the seller. The buyer and seller’s full legal names, addresses, and other contact information must appear here.
2. Describe the Business
The agreement includes a description of the business to provide a clear and complete picture of what is being sold. The business description will also confirm the legality of the seller’s ability to sell the business and the specific business entity the seller is selling.
The description will note whether the business sold is a sole proprietorship, partnership, corporation, or other business structure.
You’ll find other important information about choosing a business structure in this article.
3. Outline the Financial Terms
This section is arguably the most important part of the agreement because it spells out the price and how payment will be made.
The business sale agreement must specify the price, whether it is paid in total upfront or in installments, and any conditions under which the purchase price could vary. For example, any adjustments made for assumed debts or liabilities.
4. Detail the Terms of Sale
This section identifies what is and isn’t included in the sale (i.e., business assets, inventory, contracts, and any liabilities that may come with the sale) to eliminate any confusion down the line.
5. Describe Covenants and Obligations
The contract should also include any post-sale obligations of either the buyer or seller.
For example, the seller may be required to pay off existing debts, and the buyer may have to honor existing customer contracts.
A non-compete agreement might also be included here, prohibiting the seller from doing something similar and competing with the new owner.
Learn more about the FTC’s non-compete ban here.
6. Clarify the Transfer Process
The transfer process should also be covered. This explains how the business assets will be handed over and how employees and customers will be affected.
7. Provide Closing Details
A final clause in the contract should spell out the terms under which the sale is completed.
This includes:
- When the transaction closes
- Where the closing takes place
- Any additional funds or signatures that must be exchanged for the sale to be finalized
Discuss Your Business Purchase Agreement with a Denver Attorney
While you might be able to create a contract for a business purchase yourself, hiring a lawyer offers several advantages.
A Denver business lawyer will write a thorough contract that will comply with local laws and be tailored to the transaction.
Other reasons to hire a lawyer include:
- Ensure Legal Compliance: An attorney will ensure the contract meets all state and federal laws.
- Risk Mitigation: Legal professionals can identify and address potential risks within the agreement.
- Negotiation Support: A lawyer can help protect your interests during negotiations.
- Customized: Each transaction is bespoke and can be adapted to your circumstances.
Business purchase agreements can be complex. When you hire a Denver attorney to create this agreement, you can ensure all legal terms are included and that you are fully protected.
Contact Contiguglia Law Firm in Denver today to book a free 30-minute consultation to discuss the legal aspects of buying or selling a business.
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