Buying or selling a business is a common transaction in the corporate world. Central to this transaction is a fundamental document, one that serves as both a roadmap and safeguard for the parties involved. This document is known as a business purchase agreement.
In this guide, we’ll delve into what a business purchase agreement entails, why you need it, and how to go about preparing one. In total, here’s what you’ll learn.
What is a Business Purchase Agreement?
A business purchase agreement is a legal contract between the buyer and seller of a business that outlines all terms, conditions, and components of the transaction. This includes specifics such as the business assets being transferred, the purchase price, and the timeline for closing. Once both parties have signed this legal document, it becomes binding, obligating them to adhere to the stipulated agreements and fulfill their respective commitments.
The Importance of Business Purchase Agreements
Business purchase agreements play a crucial role in business transactions, serving the following essential functions:
- Providing clarity and certainty: Business agreements contain a clear breakdown of what is being bought and sold, along with the associated terms and conditions. This clarity ensures that both parties have a precise understanding of their roles, responsibilities, and expectations, thereby minimizing the likelihood of disputes.
- Ensuring a structured process: A business purchase agreement provides a structured framework for the transaction. It sets out timelines, payment structures and schedules, and other critical details that contribute to a seamless process.
- Providing legal protection: As a legally binding document, a business purchase agreement offers legal protection to both the buyer and the seller. In cases of disputes or non-compliance, the agreement provides a legal reference point that both parties can use in a court of law.
When To Use a Business Purchase Agreement and Preliminary Steps
A business purchase agreement should be used in any transaction that involves the transfer of ownership of a business entity from one party to the other. Before you draft this document, there are some preliminary steps you should take to increase the chances of the deal going through. After all, you wouldn’t want to invest time crafting a meticulous agreement only for the other party to back out before the deal is completed. Here’s what to know.
Request a Letter of Intent
Before drafting a business purchase agreement, request a letter of intent (LOI) from the buyer (that is if you’re the seller). An LOI specifies the broad parameters of the transaction, including a proposed purchase price, deal structure, time frame for completion, deposit amount, scope of due diligence, and major provisions that will be part of the deal.
This document helps show that the other party, more specifically the buyer, is serious about the transaction.
Request a Deposit
Securing a deposit from the buyer adds a further level of seriousness to the transaction. A financial investment before the formal signing of the official agreement demonstrates the buyer’s commitment to completing the deal.
However, it is crucial to bear in mind that as long as one party has not signed the business purchase agreement, there remains the possibility of them backing out. If you’re the seller, you should be prepared to refund any deposit sent by the buyer in case the deal does not materialize.
Obtain Pre-approval for Financing
If the purchase requires financing, secure pre-approval from financial institutions if you’re the buyer. This demonstrates your financial readiness and capability to complete the purchase. If you’re the seller, ask for information from the buyer about how they will be funding the purchase and communicate your preferred means of receiving payment.
Implement a Non-disclosure Agreement
To protect sensitive information that will be shared during the process, it might be important to sign a non-disclosure agreement. This ensures that confidential business remains secure. It can be especially vital if the sale or purchase ultimately does not proceed, as it helps protect your business from potential information leaks or misuse.
How To Write a Business Purchase Agreement
The steps outlined above lay the groundwork for a smoother transaction and form the basis of a more detailed and legally binding business purchase agreement.
1. Identify the Parties
Start by clearly listing the legal names, addresses, and contact information of all parties to the purchase. Ensure this information is both accurate and up-to-date to avoid any legal complications down the road. It’s advisable to seek legal advice to ensure all parties are correctly identified, minimizing liability risks.
2. Describe the Business
Provide a comprehensive summary of the business. This includes the nature of the business, its market, operation scope, and any unique attributes. This section should also include an assertion by the seller of their legal authority or the right to sell the business. This is where a sale form might be introduced to document the specifics of the business being sold.
3. Outline the Financial Terms
Outline the key transaction details, starting with the agreed-upon price. Other provisions to articulate include the payment terms, (such as whether the payment will be made in lump sums or via installments), the date the buyer will make payments, and the process of ownership transfer.
4. Elaborate the Terms of Sale
Provide in-depth details about the sale. Detail all the tangible assets and assumed liabilities included and any exclusions if relevant. Provide details such as the condition or appraised value of all items included in the asset purchase.
5. Describe the Covenants
List the obligations that each party must fulfill. This pertains to matters like repayment of existing debts, tax obligations, and so on. This is also the part where you can list specific buyer-seller agreements such as non-compete, non-solicitation, and non-disclosure clauses.
6. Clarify the Transfer Process
Clarify the process for transferring control of the business. This should include plans for employee transition, training, and how customer accounts will be handled. Outline who is responsible for each aspect of the transition.
7. Provide Closing Details
Specify the logistics of the closing process, including the closing date, location, and the method of final payments. Address the transfer of any relevant titles and any last-minute details required to complete the sale.
Remember that every business transaction is different. Adapt the agreement to reflect the unique characteristics of the business involved and the transaction.
Why You Should Hire a Legal Professional
While you can technically write a business agreement on your own, here are a few reasons you should consider seeking the help of a contract lawyer when preparing this document.
- Ensuring legal compliance: A contract lawyer or legal expert can help ensure your agreement adheres to all relevant laws and regulations. This ensures that the agreement is legally enforceable.
- Expert risk assessment and mitigation: Legal experts have the expertise to identify potential risks in a transaction. They can craft specific clauses to mitigate these risks or even advise you to reconsider the sale if the risks are deemed too substantial.
- Helping with negotiations: Business purchase agreements usually involve complex negotiations. Legal experts can provide valuable advice during these negotiations, making sure your rights are protected and your objectives are met.
- Customizing the agreement to specific needs: As previously stated, every business transaction is unique. Legal experts can tailor the agreement to fit the specific needs and circumstances of your transaction.
- Clarifying legal jargon: Legal documents such as business purchase agreements are typically laden with technical terms and jargon. A legal document expert can serve as your guide, interpreting these terms to ensure you fully understand the implications of the agreement you are entering into.
Wrapping Up: How to Write Business Purchase Agreement
Knowing how to write a business purchase agreement is an essential skill in the world of business transactions like M&A. This document not only serves as a legal record of the transaction but also as a safeguard for the interests and rights of all parties involved. A meticulously drafted agreement ensures transparency, sets clear expectations, and significantly reduces the potential for disputes.
If you’re working with any sort of M&A transaction such as selling or buying a business, one vital tool to have is a virtual data room (VDR). A VDR is a secure online location where all the parties involved in the M&A transaction can store, search, share, and edit the required documents. All data within the VDR is protected by permission-only access, which is enabled by the administrator, allowing strict control of the documents related to the transaction.
CapLinked is an industry leader in the VDR space and provides users in various industries with secure virtual data rooms for all types of M&A transactions. CapLinked VDRs contain cutting-edge features, which include document and version management, high-level admin controls, 24/7 customer service, encryption, and multiple layers of security. They also feature an intuitive interface that is compatible with virtually every OS.
By employing a CapLinked VDR during your M&A dealings, you’ll be able to make the entire process flow smoother, saving both time and money for both sides of the table. Try it for yourself today with a free trial.
Sources
Morgan and Westfield: A Complete Guide to the M&A Letter of Intent
Gierach Law Firm: Why Business Transactions Should Include Non-disclosure Agreements
Sean LaPointe is an expert freelance writer with experience in personal and business finance. He has written for several well-known brands and publications, including The Motley Fool and Angi/HomeAdvisor.
