Here is What Buyers Should Know About Business Purchase Agreements

Here is What Buyers Should Know About Business Purchase Agreements

 

The business purchase agreement is often one of the final steps in the purchase process. It is important to understand what is included in a business purchase agreement to ensure you are able to adequately prepare. In this article, we discuss what a business purchase agreement is specifically and what the document includes. 

 

What are Business Purchase Agreements?

A Business purchase agreement (PA), or business transfer agreement, is a legal document that establishes the transfer of a business from one person or entity to another. In simple terms, it is the agreement for a buyer to purchase a company (or stake within a company) from the seller who is the business owner. 

 

What is Included in a Business Purchase Agreement?

All business purchase agreements should be personalized according to the terms agreed upon by the buyer and seller. However, there are certain sections that you should be sure to include when drafting the purchase agreement. 

The Involved Parties

The business purchase agreement begins with stating the names of the seller and buyer (along with their contact information). In most cases, the identified party has a term associated with them next to their name, such as seller or buyer. This makes it easy to quickly identify all parties and their role. In rare cases, the company name may be used as the seller’s name. A statement that the seller has the legal authority to authorize the sale may be included (or it may be added to the business description). 

A Description of The Business

The business description identifies the legal company name as well as its business type and industry. This section should also state where the company is located and the nature of its business operations. Although a brief description may suffice, a more detailed description may be included in the purchase agreement as well. Specifically, this section may include:

 

  • A list (and description) of services and goods
  • Management systems and structures
  • An overview of the target customer (i.e. customer persona)
  • A financial summary

 

The Financial Terms of The Agreement

Of course, the primary purpose of the purchase agreement is to establish the terms of the purchase. Notably, this includes the purchase price. This section should state the purchase price clearly as well as state the manner in which the payment is made. For instance, it should state if the buyer intends to pay 100% at closing. 

If the buyer is financing the sale, then it should state the amount that will be made for the deposit (and what percentage of the sale the down payment constitutes) and how often payments will be made and over what period of time the payments will be made. For example, the buyer may pay 50% at closing and make monthly payments to the seller over the course of two years. In this case, it should state the amount for the down payment and monthly payments. 

Assets and Liabilities

Some purchase agreements also include a section for assets and liabilities. The assets section, in particular, details what assets are included in the sale. More importantly, it may detail what assets are not included. For instance, if the seller intends to hold onto a certain commercial vehicle, then this should be stated in the purchase agreement.

For liabilities, the purchase agreement should explain what the seller is and is not liable for after the sale. For example, the buyer may stipulate that they are not liable for any debt the company has accrued. 

Transfers

You will also need to detail all that must be transferred after signing the purchase agreement. This can include insurance policies, utilities, phone bills, and more.  Keep in mind, there are many transfers that cannot take place until after the business is in the buyer’s name, such as utilities and rental payments.

Transition

The business purchase agreement also establishes how long and to what extent the seller remains active in business operations to assist the buyer with the ownership transition. For example, if the business owner will remain as an employee at his current salary for up to a year, then this is where these details should be highlighted and explained. 

Participation of Brokers

The business broker should also be mentioned in the purchase agreement, especially if they are receiving a percentage of the sale price. In some cases, the purchase agreement may need to mention any attorneys and CPA professionals that are a part of the sale as well. 

Covenants

Covenants include obligations for the buyers and sellers. For example, if the buyer signs a non-compete clause, then this would be the section in which the clause is included in the purchase agreement. For sellers, covenants may include tax liabilities, loan obligations, third-party fees, transferring employee benefit plans and employee salaries for which they are responsible.

Contingencies and Warranties

This section details anything the buyer or the seller must do to move the sale forward. Contingencies are more common for letters of intent (LOI) and initial offers, but there may be certain contingencies added to the purchase agreement as well. For instance, there may be a contingency that the sale is only valid so long as the seller does not start a new competitor company in the same location. 

Closing Details

Lastly, business purchase agreements usually include information about the closing time, location, and logistics. It may name all parties that will be present during closing as well. In some cases, it may also stipulate what will take place during closing and what must continue after closing (i.e. training and transition assistance).

 

Sigma Mergers and Acquisitions Can Help You With Business Purchase Agreements

 

Sigma Mergers and Acquisitions can help you with every step of your purchase journey. Call us today if you need assistance with finding the right business to buy and completing the purchase with a legal purchase agreement.

Sigma Mergers & Acquisitions is the leading Mergers and Acquisitions, Business broker advisory firm in Dallas Texas specializing in facilitating strategic transactions for businesses across diverse industries. Our seasoned team of experts meticulously navigates clients through the intricate process of Business brokerage, mergers, acquisitions, and divestitures, ensuring seamless transitions and maximizing value. With a client-centric approach, we offer tailored solutions designed to meet the unique needs and objectives of each organization. Our comprehensive suite of services encompasses every aspect of the transaction lifecycle, from initial valuation and market analysis to due diligence, negotiation, and post-merger integration. Through a combination of extensive industry experience, market insights, and unparalleled dedication, Sigma Mergers & Acquisitions delivers exceptional results that drive growth and prosperity for our clients. Whether you are considering selling your business, seeking strategic acquisitions, or exploring other growth opportunities, trust Sigma Mergers & Acquisitions to be your trusted partner every step of the way. Contact us today to discover how we can help you unlock the full potential of your business and achieve your strategic objectives

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Scot Cockroft Business Broker
Hi, I’m Scot Cockroft.

When I founded Sigma Mergers and Acquisitions back in 2003, I had sold my business the year prior.

Now, that can sound good, but let me tell you, back in 2003, it was not easy to sell a business. Not that I’m saying in modern day times it’s easy to sell a business, but back then I interviewed broker after broker after broker, and no one was interested in actually seeing the value that my business brought to the table.

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