What to Include in a Business Purchase Agreement
One of the most important aspects of a business transaction, whether you are buying or selling a business, is the buy/sell or purchase agreement. This agreement specifies all the important aspects of the transaction. It is important for legal and tax purposes as well as adds clarity to both the buyer and the seller. Peak Business Valuation, business appraiser, reviews purchase agreements regularly. We are happy to answer any questions you have. Reach out via email or schedule your free consultation today!
What is a Purchase Agreement?
A buy/sell or purchase agreement is a written document that both parties of the transaction agree to. The best practice is to draft your purchase agreement with the help of your legal representative. You should also have them review it before signing the final document.
What Does a Purchase Agreement Include?
There are many important details the written agreement should document. Below we discuss several of the most important ones. However, there are many others that it may or may not include as well.
The first section of the purchase agreement will clearly state the legal names of both the buyer and seller. It will also include contact information.
The next most important part to include in the purchase agreement is the negotiated purchase price. Most often a business sells at or below fair market value. The more informed you are about the business the more successfully you can negotiate a purchase price. To be the most informed about the strengths, weaknesses, and value of the business you should obtain a business valuation. A business valuation will strengthen your proposed initial offer. It can also help you understand what similar businesses have sold for and the fair market value of the business. A business valuation is most helpful in determining a fair purchase price for both the buyer and the seller of a business. Peak Business Valuation works with dozens of buyers and sellers each week helping determine a fair purchase price. Questions are always welcome! Schedule your free consultation today!
Financing Terms – Payment Structure
The next thing to include in the buy/sell or purchase agreement is the financing terms and payment structure. This can include several different financing options. It can include one or more of the following financing options:
- Cash – often for a down payment
- % of Seller Financing
- % of Traditional Financing and what type
Many transactions include all three types of financing. For instance, a buyer finances the business mainly through an SBA loan. The SBA loan requires a 10-20% down payment. This down payment includes some cash from the borrower as well as a portion of seller financing. The purchase agreement will also specify the payment structure such as lump sum, balloon, etc.
For more information, see Financing a Business Purchase.
Next, it is important to state whether the transaction is an asset purchase or a stock purchase. Most business transactions are asset purchases. But, sometimes the transaction is structured as a stock purchase. In an asset purchase, the ownership transfers all or some of the assets of the business. The liabilities may or may not be included. Whereas in a stock purchase, the buyer assumes all the assets and liabilities of the business. For more information see Structuring a Business Purchase.
Seller’s Future Involvement – Ownership Transition
Often a buy/sell or purchase agreement includes a section on what the seller’s future involvement will be in the business. Many buyers request the seller to stay on for a period to transition the business. It will also describe what that ongoing involvement may include whether it be more of an operating role or a consulting role.
Determine an official date for the transition of ownership. This is especially important if you seek an SBA loan. The SBA requires the ownership transition to be less than a year from the purchase date. This date is also important for tax and legal purposes. It should be extremely clear who owns the business on a specific date. A lack of clarity causes issues for the IRS, insurance, and other legal matters.
Setting the date as the last day of the month makes wrapping things up cleaner. It makes closing the books easier as well. No matter what date you choose, work with your lawyer and accountant to manage all the details.
Many buyers will request the seller to sign a non-compete agreement for a certain period. The buy/sell or purchase agreement should clearly state whether this is a request.
The purchase agreement may also include other negotiated terms. Here are a few of the terms and conditions it may include:
- Any additions or exclusions
- How and who the current liabilities will be paid
- Any conditions
- Warranties for both the buyer and seller
- Employee continuity clauses
- Transfer of third-party contracts
Finalizing the Purchase Agreement
The buy/sell agreement becomes legally binding once both parties sign the document. It is best to have your lawyer review the document prior to signing.
The buy/sell or purchase agreement is a vital part of every business transaction. Clearly detailing all aspects will help the transition be smoother and cleaner for both parties. This includes the purchase price, terms, conditions, financing, structure, among other items.
Peak Business Valuation, business appraiser, loves working with individuals who are buying or selling a business. We seek to educate individuals on the importance of understanding the value of the business. Questions are always welcome! You can reach out via email or by scheduling your free consultation below!
Schedule Your Free Consultation Today!