Once you've agreed to purchase a business, you'll need to formalize that agreement. This is typically done using a purchase agreement, which is a legal contract that outlines the details of the sale. (This may also be known as a business purchase agreement, asset purchase agreement, stock purchase agreement or something similar depending on the exact nature of the sale.) Attorneys for both the buyer and seller should work together to draw up the purchase agreement to ensure that it is fair to both parties.
The purchase agreement typically includes:
- Purchase price and method of payment
- Terms and conditions of the sale
- Representations and warranties of the seller
- Representations and warranties of the buyer
- Actions the seller has agreed to take prior to the sale (such as paying off existing loans or securing the resignation of employees who will not be employed by the new owner)
- Details of the business to be purchased, including a list of all assets, inventory, contracts and equipment
- A list of all existing creditors who are to be paid off with the proceeds of the purchase
- How much commission is owed to a business broker (if one was used) and who is responsible for paying that broker's commission
- An agreement to resolve any disputes arising from the sale in a specific court of law or with a specific arbitration company
- Additional relevant documents known as exhibits and amendments
The exhibits may include items such as:
- Bill of sale
- A set of corporate documents including leases, financial statements, tax returns, accounts receivable and payable, articles of incorporation, bylaws and minutes
- An agreement that the seller will act as a consultant to the business, remain as an employee or agree not to compete with the business or operate in a particular territory for a certain period of time
- An escrow agreement, detailing the responsibilities of the escrow agent, if the purchase money is being held in escrow for a certain period of time
- Property deeds if the business owns real estate
- A promissory note if the buyer is paying the purchase price in more than one installment or paying the entire purchase price at a later date
- Assignment of leases and the landlord's consent to the lease assignment
Questions for Your Attorney
An attorney who has experience working with business sellers and purchasers can help guide the process of creating a purchase agreement, and should give you peace of mind in knowing that no detail has been overlooked.
Among the questions to consider asking your attorney:
- Have you previously written purchase agreements?
- What red flags should I be aware of?
- How much do you charge for your services?