Business Purchase Agreement Best Practices

Buying or selling a small business is a rewarding achievement in your entrepreneurial journey. Once you’ve decided to transact, you’ll need to formalize the deal with a business purchase agreement (BPA). A well-drafted BPA helps successfully guide any business acquisition and protects both parties during and after the transaction. 

Understanding what is included in these legally binding contracts and when to seek the advice of a professional will facilitate a smooth sales process.

What is a business purchase agreement?

As part of buying a business, both the buyer and seller typically follow a formal sales process. Signing a letter of intent and conducting due diligence typically kick off the process. If everything goes well, the purchase agreement for the business is drafted to document the terms of the sale.

A business purchase agreement is the legal document that finalizes and documents the transaction of a business sale. It’s the point at which you decide whether or not to proceed with the transaction, at what price, and under what terms and conditions. Upon execution, the buyer effectively takes over the business from the seller. 

Business purchase contracts typically include:

• The purchase price and the terms at which the funds will be distributed (such as any holdbacks or earnouts)
• What’s included in that price (assets and liabilities, contracts to be assigned, employees to be transferred, how proration of revenue and expenses will be handled, etc.)
• The closing date
• Representations and warranties
• Indemnifications made by the seller
• Remedies of breach of contract
• Any covenants, such as non-compete, non-solicitation (of customers, suppliers, and/or employees), confidentiality, and non-disclosure restrictions

As a result of being a comprehensive legal document, small business purchase agreements usually include the standard sections outlined above. However, hiring an attorney to negotiate and customize the terms and conditions is often recommended. 

Who should use a business purchase contract?

A purchase of business agreement should be used by anyone buying or selling a business. The transfer details are outlined in this legally binding contract, which protects both parties under local, state, and federal laws. This agreement for the sale and purchase of a business can apply to any type of business, including brick-and-mortar retail and restaurants, e-commerce, and professional services.

What are assets and shares in a business purchase agreement?

Business acquisitions are typically structured as either an asset sale or a stock sale. While both structures are capable of reaching the same business goal, each has its own set of benefits and drawbacks. Furthermore, they differ significantly in terms of legal considerations and tax treatment.

The buyer of an asset purchase is interested in buying some or all of a company’s operating assets and transferring the individual assets to a new entity. An asset purchase can include both tangible and intangible assets. Equipment, inventories, and fixtures are examples of commonly purchased tangible assets. Customer lists and patents, on the other hand, are examples of commonly purchased intangible assets.

A share or stock purchase entails buying the company’s stock from its shareholders—typically the entirety of issued shares. Because the buyer is purchasing a legal entity, he or she is purchasing the entire company, including all of its assets and liabilities.

Asset purchases are appealing because buyers can cherry-pick the specific assets they are interested in while leaving behind any unwanted liabilities. However, in a share purchase, the entirety of the company’s assets and liabilities are transferred to the purchaser. Because of this, asset purchases are generally more common than stock sales. 

Regardless of the type of transaction, speak with an accountant to understand the impact your business sale or purchase will have on your tax situation, as both structures will have different outcomes.

What are assumed liabilities?

Even in an asset purchase, the buyer is almost always expected to absorb some of the seller’s business liabilities. These are known as assumed liabilities and typically include current account payables, accrued vacation days of employees, and liabilities linked with assigned contracts (such as a lease). Other types of liabilities that may be absorbed in an asset purchase or would have to be absorbed in a share purchase include existing loans, existing litigation liabilities, and product warranty liabilities.

What are restrictive clauses in a sale of business agreement?

A restrictive clause, or covenant, is an agreement or pledge that prohibits one party from doing particular things. For example, the seller of the business may be prohibited from conducting the following activities for a specified period after closing:

• Soliciting existing customers or suppliers
• Soliciting and hiring current staff
• Competing with the business 
• Disclosing proprietary information 
• Disclosing terms or specific aspects of the sale

Signed on the dotted line

As a buyer or seller, it is critical that you understand your rights and duties during the business acquisition process, as well as recognize when seeking professional guidance is a smart choice. Armed with these business purchase agreement best practices, you’re ready to buy your next business or sell your current one with confidence.