12 Things to Include in a Business Purchase Agreement

In addition to the standard terms of a business purchase agreement, other vital provisions may be added to protect the seller’s interest. The ultimate aim is to draft a contract that conveys the parties’ true intentions without being too cumbersome.

The provisions you include in the agreement generally depend on what the parties negotiate.

What Is a Business Purchase Agreement?

A business purchase agreement or transfer agreement is a contract between a business owner and a buyer to transfer rights and ownership in the business entity to the latter. In order words, it contains the terms and conditions that facilitate the sale of a business from one party to another. Business purchase agreements are binding and legally enforceable contracts and, as such, must be drafted with care. They seek to protect the interests of all parties involved and clarify the rights, responsibilities, duties and liabilities of the buyer and seller.

Business purchase agreements can be used for business acquisitions involving the sale of all shares or assets. The sale of shares typically applies to incorporated companies where the owner sells all issued shares to the buyer. In a sale of assets, the owner sells the business’s assets instead of the business itself. This means the entity retains its name, liabilities and tax fillings.

Business purchase agreements apply to different business structures, including sole proprietorships, partnerships, limited liability companies (LLCs) or corporations.

Why Is a Business Purchase Agreement Important?

Business purchase agreements stipulate the terms and conditions of the transactions, which helps to ensure that the buyer and seller are on the same page. They help protect each party’s interests and clarify their rights and obligations. Business purchase agreements also detail which assets and liabilities are included in the transfer. Ultimately, they serve as evidence of the transaction and may be enforced if a party contradicts the stipulations.

What Is Included In a Purchase Agreement?

You can include various provisions in the contract when selling your business. But remember, the more outlandish the contract gets, the more challenging it may be for the buyer to sign. Be reasonable, draft a win-win agreement, and include the most critical clauses protecting both parties’ interests.

Below is a compiled list of things you should include in the business purchase contract:

1. Standard Terms

The standard terms of a business purchase agreement include:

• Identification of parties
• Business description
• Purchase price
• Warranties and representations
• Closing details

2. Transition Timeframe

It is common for business owners to remain with the company for some time after the sale, making it essential to stipulate in the contract how long the transition will take and the specific details of passing the business on to the buyer. Including such information in the contract mitigates confusion and conflicts since all parties are expected to read and understand the terms and conditions before execution. Providing details about the timeframe also makes the transition process more effective and efficient.

You may include the provision in the purchase agreement or as a separate contract. If there is compensation for the seller, then a stand-alone employment agreement may often be drafted in addition to the purchase agreement.

3. Health Insurance

Business owners who sell their companies may want to remain on the company’s health insurance. When writing the business sales agreement, this is something you should consider, especially if you will be providing a lengthy transition period.

Many business owners sell their companies to retire. Business owners who sell their insurance companies may know the benefits of keeping their business’s insurance plan, but that may not be true for others.

If you have a good health insurance plan at your business, you should consider adding to your contract that you will remain on the business’s health insurance. Staying on your company’s health insurance after selling your business can save you money and keep your family healthy. Some buyers may be prepared to keep the seller on their plan for up to seven years after completing the deal. It all depends on what the buyer and seller are willing to negotiate.

4. Employee Status

Some business owners want to become employees in their businesses after the sale. If that is the case, it is best to spell out your expectations regarding working hours, job functions, and other related details as much as possible. A good option is for the seller to work full-time for a brief period, and then they can work part-time to transition into retirement. There are cases where sellers work even into their 80s.

Some sellers appreciate coming into the office one or two days a week to contribute to the business’s success. Others prefer a shorter period but may sign an employment agreement to make the buyer happy. It would be best if you navigated this addition to the contract of sale with a thoughtful eye to what each party wants and needs.

5. Access to the Property

Many business owners start their companies on their properties. While you can include the property in the business purchase agreement, other options exist. For example, you could keep the property and lease it to the buyer. Alternatively, you may include a provision in the contract allowing access to the property after the sale. This is particularly true if you have an earn-out as part of your purchase agreement. You want to be able to access the company’s books and records to see how much profit they are making and how much is owed to you based on their financial records.

6. Payment Plan

Most business owners want to be paid as much as possible at the closing. However, buyers typically want to owe some money after the sale to feel comfortable that the seller has skin in the game to ensure the transition goes well. In this case, you may stipulate the payment plan for the business.

The way you receive payment for your company is vital. You will likely pay more taxes if you take a lump sum for your business. On the other hand, if you receive smaller payments over an extended period, your tax liability might be less.

7. Right of First Refusal

You may have younger children who aren’t ready or able to take over the business. Instead of creating a trust, you may include a right of first refusal (ROFR) in the agreement, giving you or your family the first chance at buying back the business if the seller resells the company. This may not be common, but it is something to consider.

8. Debt Transfer

In some sale transactions, the buyer takes over the cash and other assets belonging to the company, but they may also acquire outstanding debts and other liabilities. The seller or their children or family members may remain company employees, although they may retain no ownership rights. Thus, to protect them against existing and future liabilities, the parties may include an indemnity clause in the agreement. Parties may also agree on a debt-transfer clause even if the seller or their relatives do not remain employees of the company.

Consult Synergy Business Brokers for Your Business Sale Needs

 

Selling your business can be more straightforward when you hire business brokers, especially if you have specific needs or demands. Business brokers can help you negotiate and get the best possible deal. Again, selling a business can sometimes be emotional, so it helps to partner with a professional with experience getting the job done and taking the load off your shoulders.

Synergy Business Brokers is an award-winning mergers and acquisition firm with years of experience helping buyers and sellers get the best deals in business sale transactions. Our team of professionals can help you negotiate the terms of the agreement and advise you before you sign. Contact us now to learn how we can help you protect your interests!