Whether it comes down to buying or selling a business, both are common transactions to be expected in the corporate world. At the heart of each transaction is a critical document that guides and protects the interests of all parties involved. This document, a Business Purchase Agreement (Agreement), is the legal contract between the buyer and seller of a business. Whether the assets involved are tangible or intangible, the terms and conditions of the transaction are all contained in the Agreement. Below is a discussion of the importance of having a valid Agreement and the necessary components that should be included in every legally binding contract.
The Importance of an Agreement
By outlining what is included in the transaction, an Agreement can provide clarity and certainty to both the buyer and seller. The Agreement should offer a detailed overview of what is being bought and sold, what assets or property are excluded from the sale, the purchase price, and the closing date of the sale. An Agreement can also provide either party’s responsibilities, expectations, and warranties or representations. This reduces the chances of disputes arising during the transaction period.
The following elements are essential to giving an agreement backbone:
- Identity of Parties Involved
An Agreement should start with the buyer and seller’s information to avoid ambiguity about who is involved in the transaction. The legal names, addresses, contact information, and any other affiliates either party may have that are a part of the transaction should be accurately included in the Agreement.
- Description of the Purchase Item
A physical description of the property or assets being sold should be included in the Agreement. The description should involve a statement of the property’s condition, the location of the business, the services or products offered to consumers, the type of business entity the company is registered as, the structure of the management system, and financial summaries of the organization. If any tangible assets are involved in the transaction, distinguishable characteristics, such as serial or model numbers, should also be included.
- Purchase Price and Payment Terms
The purchase price outlines the cost the buyer pays for the property or assets, the structure of such payment, and whether any deposits have already been made. If the purchaser has obtained any third-party financing, such as a bank loan, it should also be included. The Agreement must dictate the payment terms of the transaction and whether the purchase price will be financed through a payment schedule (monthly installments) or made in lump sum payments. Due dates, acceptable payment methods, and penalties for late payments should all be included in the terms of the Agreement.
- Representations and Warranties
Warranties are the seller’s promises that certain facts about the business are true, while representations are a snapshot of the business conditions at the time of the sale. Both provide assurance to the buyer and allocate risk between the parties involved in the transaction. They also demonstrate that the buyer has the financial capabilities to complete the purchase. Including all warranties and representations made regarding the transaction ensures the buyer has legal recourse if any information proves inaccurate and promotes a fair and transparent transaction.
- Delivery and Transfer
The Agreement must include how the delivery and transfer of ownership is to be conducted. It is highly recommended to include a timeline for delivery that specifies the exact moment ownership of the property is officially transferred. Regarding tangible assets or property, the delivery methods should be specified to describe when and how the seller is expected to supply the buyer with the promised product.
Takeaway
A business purchase agreement is an essential legal document that ensures clarity, protects the interests of all parties’ interests, and minimizes potential disputes during a business transaction. By including these critical components, the Agreement provides a clear framework for the transaction, fostering transparency, accountability, and fairness for a successful and smooth business transfer. Having an experienced attorney draft or review a business purchase agreement can provide all parties involved with clarity and peace of mind.