Business Purchase Agreement: Steps to Consider and What to Include

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What is a Business Purchase Agreement?

A business purchase agreement, also called a “BPA,” is a legal contract between a buyer and seller, where the buyer acquires the ownership of a business entity (typically both assets and liabilities) from the seller for a certain price. The agreement specifies the legal and business terms for buying the business entity and governs the transfer of ownership.

During a business acquisition, business purchase agreements safeguard the rights of both parties. They provide a legal framework, transparency, and clear obligations for both parties during the transaction.

Note, business purchase agreements can be set up as either a stock purchase (entity purchase) or asset purchase (only buying the assets from a business), depending on how the deal is set up between the buyer and seller.

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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.

• 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.
• 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.
• Financial Terms: This provision includes the purchase price, any deposits required by the seller, and the date and time of the transfer.
• 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.
• 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.
• 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.
• 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.
• 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.
• Representations and Warranties : Representations and warranties are promises made by the seller about the business being sold. These promises can include statements about the business’ assets, liabilities, financials, and operations. The point of this section is to give the buyer assurances as to what they are buying.
• Indemnities: The indemnities section outlines any obligations one party would have to another to compensate or ‘indemnify’ the other party for certain losses, damages, or liabilities that may arise after the transaction is complete. In other words, indemnities are designed to protect both the buyer and seller from any unforeseen events or misrepresentations.
• Dispute Resolution : The dispute resolution clause provides both the buyer and seller a procedure and means to address any sort of dispute that may transpire as a result of the transaction. It is always smart to outline how disputes are addressed in any type of business transaction, so that both parties understand their options and means beforehand.

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Steps to Consider For a Business Purchase

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:

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.
2. Request for 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.
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.
4. 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.

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.

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.

Why Hire a Lawyer for Business Purchase Agreements

The following are some advantages of hiring a legal counsel for business purchase agreements:

• Applies Legal Knowledge: Lawyers focusing on contract law are well-versed in the intricacies and needs of business purchase agreements. To guarantee that the contract conforms with all relevant rules and regulations, they can draft, evaluate, and negotiate it.
• Mitigates Risk: Attorneys can assist in identifying potential risks and liabilities related to the acquisition of a business. They can create provisions like indemnification clauses, representations and warranties, and dispute resolution systems that safeguard the interests and reduce risks.
• Supports Negotiations: Attorneys can bargain for favorable terms and circumstances on your behalf. They can assist in comprehending the significance of certain clauses and offer suggestions on whether to accept, reject, or amend particular words.
• Offers Customization: A lawyer can modify the contract to meet the needs and goals since every business acquisition differs. They can ensure that the agreement accurately reflects the individual's wishes and safeguards the interests.
• Resolves Disputes: In the event of a dispute between the parties, the early involvement of a lawyer can aid in facilitating resolution through formal legal processes or, if necessary, through negotiation.

Types of Business Purchase Agreements

The following are the different types of business purchase agreements:

• Asset Purchase Agreement : In an APA, the seller's corporate entity is left behind as the buyer takes over certain business assets and obligations, such as inventory, equipment, client lists, and contracts. This kind of contract lets the buyer select the assets and obligations they want to take on.
• Stock Purchase Agreement: A SPA entails the acquisition of all or the majority of the seller's ownership stakes in the company. Ownership of the entire business, including its contracts, liabilities, and assets, is transferred under this agreement.
• Merger Agreements : It combines two independent businesses to create a new organization. One company may acquire the other through an acquisition or a merger of equals. The merger's terms and circumstances, including how shares will be handled, the organization of management, and other crucial information, are laid out in the agreement.
• Membership Interest Purchase Agreement : It is utilized when an LLC ( Limited Liability Company) is the target of the acquisition. Like a stock purchase agreement, the buyer can buy membership interests or ownership holdings in the LLC.
• Joint Venture Agreement : is utilized when two or more parties join forces to create a new legal organization for a particular goal or activity. Each party's contributions, obligations, and profit-sharing arrangements are described in this agreement.
• Partnership Buy-Sell Agreement : This contract is frequently used in partnerships to set up a structure for purchasing or selling ownership interests in the partnership in the case of certain triggering circumstances, such as the retirement, demise, or withdrawal of a partner.
• Franchise Agreement : When shopping for a franchise, the buyer and the franchisor enter right into a franchise settlement. The terms and circumstances of the franchise, such as costs, branding, and operational rules, are defined in this settlement.

Business Purchase Agreement Sample

THIS AGREEMENT (the “Agreement”) is made effective this [DATE] by and between [SELLER NAME] (the “Seller”) and [BUYER NAME] (the “Buyer"), referred to collectively as “the Parties”.

The Parties have reached an understanding with respect to the Buyer’s purchase of [BUSINESS NAME]. The Parties agree as follows:

1. Seller. [SELLER NAME], an individual with the following address: [ADDRESS].

As of the date of this Agreement, Seller owns one hundred percent (100%) of the outstanding Membership Interests in [COMPANY NAME]. “Membership Interest” includes a full and complete ownership interest in the company, including all voting and management rights, and economic interests and rights, arising under [STATE] law.

1. Buyer. [BUYER NAME], a [STATE] limited liability company with an address of: [ADDRESS].

Buyer desires to acquire the Membership Interest currently owned by Seller.

1. Sale of Membership Interest. Seller hereby agrees to sell, and Buyer agrees to buy one hundred percent (100%) Membership Interest in [COMPANY]. This sale is intended to convey any and all ownership interests currently held by Seller.
2. Representations -Seller. Seller represents that his/her Membership Interest is free and clear of all encumbrances or security interests of any kind, and that he has not sold, transferred, assigned, or otherwise compromised such Membership Interest in [COMPANY] in violation of [STATE] law. There are no judgments, charging orders, or liens against Seller and no litigation or proceedings pending against Seller or [COMPANY] which might impede the actions hereunder.
3. Non-Compete. For a period of [NUMBER OF YEARS] years after the Closing, Seller shall not: (a) within any geographic region in which Buyer or Business operates, compete with (or become interested as an owner, partner, principal, agent, director, officer, or consultant, with any company or business that competes with) any product or service currently offered by Seller. Seller shall not, at any time, whether individually or on behalf of or through any third party, use any of the assets, or the trade secrets or other confidential information, 2 to solicit, divert, entice, persuade, or appropriate, either directly or indirectly, the business of any client, customer, partner or affiliate of Buyer, or to otherwise request or encourage any such party to breach any agreement or terminate any relationship between such party and Buyer.
4. Restraint. In further consideration of Buyer, Seller will not at any time after Closing use a symbol, logo, domain name, trademark, or business name substantially identical or deceptively similar to the business names, trademarks or the domain names associated with the Entity.
5. Transfer of Licenses and Certifications. Parties agree that any licenses and certifications owned by [COMPANY] shall remain the property of [COMPANY] and that any licenses and certifications owned personally by [SELLER] shall remain the property of [SELLER]. A description of the licenses and certifications owned by [COMPANY] is attached to this Agreement as Exhibit “A.” Parties agree to cooperate to execute any releases, assignments, amendments, or other documents necessary to effectuate transfer of said licenses and certificates. Furthermore, Seller agrees to indemnify Buyer against all claims made regarding rights and ownership of said licenses and certificates.
6. Retention of Debts, Liabilities, and Payables. Parties agree that all debts, liabilities, and payables of [COMPANY] and [SELLER] acquired, established, or obligated prior to closing will remain the responsibility of [BUYER]. A description of the known debts, liabilities, and payables of [COMPANY] subject to this clause is attached to this Agreement as Exhibit “B.” This list is not intended to be exclusive. Parties agree to cooperate to execute any releases, assignments, amendments, or other documents necessary to effectuate retention of said debts, liabilities, and payables. Furthermore, Seller agrees to indemnify Buyer against all claims made regarding said debts, liabilities, and payables.
7. Tangible Assets. Parties agree that all tangible assets owned by [COMPANY] or [SELLER] acquired prior to closing will remain the property of [BUYER]. A description of the tangible assets of [COMPANY] subject to this clause is attached to this Agreement as Exhibit “C.” Parties agree to cooperate to execute any releases, assignments, amendments, or other documents necessary to effectuate retention of tangible assets.
8. Bank Accounts. Parties agree that all bank accounts owned by [COMPANY] prior to closing will remain under the control and ownership of [SELLER]. [COMPANY] will close said bank accounts within thirty (30) days of closing. A description of the bank accounts subject to this clause is attached to this Agreement as Exhibit “D.”
9. Consideration. In consideration for the transfer of a one hundred percent (100%) Membership Interest in [COMPANY] under this Agreement, Buyer shall pay [PURCHASE PRICE] and No/100 US Dollars to [SELLER].
10. Closing. The closing of the transactions contemplated by this Agreement (the "Closing") will take place at such time and place as Buyer and Seller may mutually determine.
11. Amendments or Execution of Company Documents. Seller agrees to cooperate with Buyer to execute any releases, assignments, amendments, or other documents necessary to effectuate the events and intent contemplated by this Agreement.
12. Investment Intent of Buyer. Buyer acknowledges that the interests transferred herein are not and will not be registered under the [LAW] Securities Act or the Federal Securities Act of 1933, and are being sold in reliance on the exemptions and exclusions set forth in those laws as a sale not involving a public offering. Further, Buyer is acquiring said interest for its own investment purposes and not with the intent of selling or otherwise transferring such interest. Buyer is able to, and hereby does, appreciate and accept the risk inherent in the purchase of this non-liquid investment interest.
13. Entire Agreement. This Agreement and the Attached Employment Agreement constitute the entire agreement between Buyer and Seller with respect to the subject matter hereof and may be altered, amended, or repealed only by a duly executed written agreement.
14. Severability. If any part of this Agreement shall be held to be unenforceable for any reason, the remainder of the Agreement shall continue in full force and effect.
15. Online Mediation. If a dispute arises out of or relates to this contract, or the breach thereof, and if the dispute cannot be settled through negotiation, the parties agree first to try in good faith to settle the dispute by mediation administered by the JAMS Endispute online mediation service https://www.jamsadr.com/endispute/, or similar online mediation service agreed to by the parties.
16. Controlling Law. This Agreement shall be governed and enforced in all respects by the laws of the State of [STATE].

IN WITNESS WHEREOF, the parties have executed this Agreement this [DATE].

Final Thoughts on Business Purchase Agreements

A well-drafted business purchase agreement is essential for assuring a transparent and robust business acquisition technique, offering clarity, and lowering the chance of disputes among the parties. It is strongly advised to seek advice from a legal professional while drafting or revising such agreements to ensure they comply with the particular terms and legal framework of the applicable jurisdiction.

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