A business purchase agreement, or business transfer agreement, is a contract that outlines the terms of the transaction when buying or selling a business. It is the final part of a business acquisition.
The purchase contract includes closing details of the business sale, such as the price, the purchased goods, and certain representations and warranties to which both parties agree.
A business acquisition can be either a stock sale or an asset sale. Therefore, there are two kinds of purchase agreements: Stock purchase agreements and asset purchase agreements. A stock purchase agreement involves purchasing the owner’s shares of the selling business (aka “target”), while an asset purchase agreement is when the buyer is buying only the individual assets and liabilities of the company.
When to use a business purchase agreement?
In mergers and acquisitions, you should put in writing all the details of the transaction in a business purchase agreement. The moment to draft this document is after the due diligence process, when the buy-side has inspected the target company and has confirmed the deal is going to be beneficial.
To guarantee a smooth business transaction, the purchase agreement must be carefully drafted by a business attorney. The lawyer is going to add clauses and conditions that are going to protect the buyer from liabilities, based on the observations made after conducting due diligence.
What to include in a business transfer agreement?
- Purchase Price
Even though a tentative purchase price has been settled at the start of the negotiation in the letter of intent, the final price is established in the purchase agreement. After business valuation and conducting due diligence, the buyer is going to have an accurate view of the value of the target company and determine the final offer.
This section also describes the time and form of payment for the business acquisition.
- Scope of the purchase.
Whether it is an asset or stock sale, the business purchase agreement must exactly define what is about to be transferred.
This section includes a detailed description of the goods, which can include customer databases, supplier lists, copyrights, trademarks, and any other intellectual assets.
Tangible assets are also included in this provision. Equipment, tools, properties, the condition in which they are, and their value are also described.
- Closing date
The date, time, and place in which the purchaser of the business is going to pay and the seller will deliver the assets.
- Terms of payment
Determine certain aspects of the transaction, such as the existence of a deposit, in case there is one if it’s getting refunded.
- Contingencies
What needs to happen before the parties can close the deal? Common contingencies include the buyer obtaining financing or the target fulfilling certain disclosures.
- Warranties
These are promises about the business that are still effective after the sale. For example, the seller can warrant that the equipment in the business will work effectively for at least 1 year after closing.
- Covenants
These are promises that the parties make to each other. Common seller covenants are that the seller will help transition the business to the buyer for some months after the buyer buys the business, or a non-compete agreement.
- Representations
Reps and warranties are statements that the seller makes to the buyer about the state or history of the business. For example, a seller can “represent” that its customer list is treated like a trade secret and as confidential.
- Remedies
What are the parties’ rights if things go wrong after the sale? Is there a holdback clause that a buyer can turn to? A holdback clause is a reserve of funds from the purchase price that the buyer can access if he or she is damaged by the seller’s misrepresentations or breach of the purchase agreement.
Importance of business purchase agreements
It is essential to establish in writing the terms and conditions of the sale to ensure all parties understand their rights and obligations in the business transaction. This way both parties can give written proof of the deal they agreed with and enforceable clauses they can resort to if needed.
Business purchase agreements provide both parties protection against any liabilities that may present after the business purchase. The proper documentation can save both parties from expenses derived from unexpected outcomes.
Purchase agreements are generally binding. But a carefully crafted one can give the buyer an “out” if things go sour. For example, if a seller’s representations are found to be false, the buyer can get out of the sale, or, if there is a holdback clause, the buyer can use this self-help remedy to obtain the funds.