The Essential Components of a Purchase of Business Agreement
When buying a business, the deal must be structured perfectly to protect both you and the seller.
Because of this, you should hire a lawyer to assist you. Not only do they have the experience to get the most out of your agreement, but they can also review the document to ensure it’s legally enforceable.
In other words, unless your agreement is well-drafted, you may end up like the Addams family–at war with each other for a deal gone wrong.
Keep reading to learn more about what goes into the purchase of business agreement.
Table of Contents
The Preamble: Setting the Stage
The Preamble is the introduction of the purchase of business agreement (PBA), and it serves as a brief overview of the agreement. This section typically includes:
Identifying the Parties
The first component of the Preamble is to identify the parties involved in the transaction. This means clearly stating who the buyer and the seller are, along with their respective addresses and contact details.
Recitals
Recitals are statements that provide context and background information about the transaction. They might include the reasons for the sale, the business’s history, and any other relevant details that help set the stage for the agreement.
Agreement Terms: Defining the Deal
The heart of the PBA lies in the Agreement Terms, where the nitty-gritty details of the transaction are defined. This is one of the most important steps in buying a business. This section includes:
Assets and Liabilities
This part lists all the assets and liabilities being transferred to the business. It’s crucial to distinguish between tangible assets (like equipment and inventory) and intangible assets (such as intellectual property or customer lists). Additionally, any outstanding debts and liabilities should be clearly defined.
Allocation of Purchase Price
The allocation of purchase price is a tax-related component. It defines how the purchase price will be allocated among the various assets. This allocation can impact the tax implications for both the buyer and the seller.
Closing Date
The closing date is the date on which the actual transfer of the business takes place. This section specifies when and where the closing will occur and what needs to be completed before the deal is finalized.
Representations and Warranties: Ensuring Trust and Transparency
Both parties make promises to build trust and transparency in the transaction. These often include:
Seller’s Representations
The seller makes statements about the business’s condition and assets. Some examples are financial statements and information about the business’s legal standing. There might also be ongoing legal disputes.
Buyer’s Representations
On the other side, the buyer also makes representations about their ability to fulfill the terms of the agreement. This can include confirming they have the financial means to complete the purchase.
Indemnification
Indemnification clauses detail how disputes, claims, or losses related to the business after the sale will be handled. The document explains what each party must do and how they will handle any problems after the sale.
Closing Conditions: Preparing for a Smooth Transition
Closing conditions outline the requirements that must be met before the sale can be completed. These typically include:
Due Diligence
Due diligence is the process of investigating the business’s financial and legal health. This section outlines the buyer’s right to conduct due diligence and sets a deadline for its completion.
Regulatory Approvals
If the business requires specific approvals or permits to operate, this section will specify what needs to be in place before the sale can proceed. It’s crucial to ensure that all necessary licenses and permits are secured.
Third-Party Consents
If the business has contracts with third parties, such as suppliers or landlords, this section outlines the need for their consent to transfer these contracts to the buyer.
Financing
If the buyer is relying on financing to complete the purchase, this section details the terms and conditions for obtaining that financing.
Post-Closing Provisions: Planning for the Future
Once the deal is done, several post-closing provisions dictate what happens next. These include:
Transition Period
A transition period is often agreed upon, during which the seller may assist the buyer to ensure a smooth handover. This can include training, introductions to key employees, or continued involvement in specific business operations.
Non-Compete and Confidentiality Agreements
To protect the buyer’s interests, non-compete agreements may be included to prevent the seller from starting a similar business in the same area or disclosing confidential information.
Dispute Resolution
This section of the business acquisition contract outlines how any potential disputes or disagreements between the parties will be resolved, whether through arbitration, mediation, or litigation.
Miscellaneous Provisions: Covering All Bases
Miscellaneous provisions are often included in a PBA to address any other important aspects of the transaction. These can encompass:
Governing Law
Determining which state or country’s laws will govern the agreement can be crucial, as it impacts how the agreement is interpreted and enforced.
Entire Agreement
This ensures that the PBA is the sole and complete agreement between the parties and that no other prior or contemporaneous agreements are valid.
No Waiver
The no-waiver clause prevents one party from waiving their rights under the PBA if the other party fails to perform. Furthermore, not enforcing any part of the agreement now doesn’t mean a party can’t enforce it later.
Severability
This states that if any part of a PBA is declared invalid or unenforceable, the remaining provisions of the agreement remain in full force and effect.
Force Majeure
This explains how both parties should deal with unexpected events or situations they can’t control. These events could be things like natural disasters, war, or riots. If these events stop one or both parties from doing what they agreed to in the PBA, they should follow this clause.
A Comprehensive Blueprint for a Successful Purchase of Business Agreement
A Purchase of Business Agreement is a vital document that outlines the terms and conditions of a business sale. It must include essential components such as the purchase price, assets and liabilities, and warranties and disclosures.
Take the right step in protecting your interests by consulting a lawyer for drafting and reviewing your PBA today. Contact a trusted legal team to guide you through the process and secure a successful business acquisition.
And you don’t have to stop here. For additional resources and articles check out the rest of our site.
Last Updated on November 2, 2023
