What Is a Business Purchase Agreement?
A business purchase agreement or a business sale agreement documents the sale of a business. You can use it to sell your whole company or pick out business assets for sale, such as inventory or equipment. If you choose the latter option, you can keep the rest of the entity in your possession.
This agreement is usually for the sale of established businesses, not brand-new companies. Buyers and sellers can use this agreement for the following business types:
- sole proprietorships
- partnerships
- corporations
- small businesses
- franchises
- startups
- limited liability companies (LLCs)
Legal Templates makes it easy to create a business purchase agreement for your needs. You can outline your company type and record what assets and liabilities come with the sale. We help you create a transparent document so no terms are left to chance.
Why Do You Need a Purchase Agreement When Buying a Business?
A business purchase agreement creates a smooth transfer of operations. It ensures that each party knows what the other is keeping and taking, so there’s no confusion. Plus, this document establishes when the sale occurs, so you can plan training periods for executives and employees as ownership changes.
This document also solidifies key terms relating to the sale. As a result, you can avoid last-minute changes and ensure that buyers and sellers are keenly aware of their rights and responsibilities.
When buying or selling something as valuable as a business or its assets, it’s important to know exactly what you’re getting or giving up. When you record a business sale using our template, you can ensure the seller has the right tools and language to disclose information about the company’s state and liabilities. With an adequate liability disclosure, you can increase buyer confidence and assure them they won’t become responsible for past financial woes.
What to Do Before Writing a Business Purchase Agreement
Before you enter a business purchase agreement, you can follow these steps to make preparations and give yourself an advantage when negotiating a deal:
- Decide if you want to buy the whole business or just some assets.
- Consult legal and tax advisors to understand the implications of any transaction.
- Show interest via a letter of intent to purchase a business.
- Conduct due diligence by studying the company’s financial statements and current operations.
- Ask for a confidentiality agreement or non-disclosure agreement if you are sharing sensitive information.
- Consult a business appraiser to fully understand the company’s worth.
- Review existing business contracts to see ongoing obligations and debts.
- Use valuation and due diligence findings to negotiate terms.
- Secure financing via a business loan agreement so you can afford the purchase.
How to Write a Business Purchase Agreement
When you draft a business purchase contract, you can take steps to guarantee the document reflects your needs and upholds legal standards. Use our pre-designed template to ensure you include all the key details.
1. Record Information for Both Parties & the Business
Your agreement should include full legal names for both buyer and seller. Our template lets you easily input all buyers’ and sellers’ names. We even let you add more than one buyer and seller name if you have multiple parties involved.
You should also add information regarding the business itself. Include a description with the business address and entity type.
Example:
Sellers: John Martin and Stephanie Caldwell
Buyers: Nicole Baker
Company: Ace Computers, a limited liability company (LLC) that sells refurbished hardware located at 14 Pinehurst Avenue, Chicago, IL 60601
2. Dictate the Sale Terms
Declare if the pending sale will be the entire business or just some assets. Our template lets you easily identify which assets are included and left out of the sale. Simply select whether you will include or exclude all assets or sort them by business category.
Alternatively, you can only sell or exclude assets that you list in an exhibit. An exhibit is an additional document that accompanies your agreement and highlights specific assets. Be as specific as possible if you don’t plan to transfer the entire business to the buyer.
Example:“This agreement includes the sale of all books, records, goodwill, cash, receivables, insurance, equipment, and fixtures, as well as all inventory, excluding the sale of marked electronic devices.”
Assets vs. Stock Sales
Note that a business asset purchase agreement differs from a business stock purchase agreement. Assets are valuable items the company owns, while stock refers to the shares of company ownership.
If you are only selling assets and not equity, you may use an asset purchase agreement to simplify the process. This way, you won’t have to disclose liability details, and you can just identify the assets you’ll sell.
3. Detail Assumed Liabilities
State whether the buyer will take on all liabilities with the purchase or only the ones you describe. If you want to hand-pick liabilities, you can identify them in an exhibit or by categories like employee-related expenses or environmental liabilities.
When you provide specific liability details, you can ensure that the buyer and seller know the full extent of their responsibilities when the sale is done. Sellers often use liabilities as a bargaining chip, meaning the buyer agrees to accept existing debt in exchange for a lower purchase price.
4. Highlight the Purchase Price & Payment Details
List the purchase price as a total sum and detail allocations of the total. For example, suppose the total purchase price is $1 million. You may allocate $400,000 for the purchase of tangible assets and $600,000 for intangible assets like intellectual property. Our template lets you easily make these allocations so everyone knows exactly how the buyer will spend the purchase amount.
Allocations must comply with Internal Revenue Code § 1060 because they can have unique tax implications.
Once you sort these details, you can specify how the buyer will pay. A buyer with existing capital may opt to pay the full amount upfront. They can also put a deposit down and pay for the business in scheduled installments. State the payment due dates and whether the loan amount will accrue interest if payments come in installments.
5. Mention Closing Details
List the closing date so both parties know when the deal goes into effect and when the business will change hands. At closing, you can adjust the final purchase price based on changes in financial metrics or conditions.
Examples of adjustments might include prorated expenses like property taxes, utilities, and other costs incurred. Adjustments ensure fairness for both parties, minimize risk, and foster a smooth closing.
6. List Representations & Warranties
Factual statements and promises in a business purchase agreement establish trust between the buyer and seller. If their representations or warranties are false, the other party has legal recourse to seek damages or terminate the contract.
When you use our template, you don’t have to think of these representations and warranties yourself. Simply choose any of the pre-written options that apply, as we have several available based on ones that frequently show up in business sales.
Example:“The seller has no liens filed against them, nor have they otherwise contracted to sell part of the business. The seller has paid all local, state, and federal taxes on the business.”
7. Provide the Covenants
Contractual covenants are legally binding portions of the contract between buyer and seller. Common covenants include promises regarding:
- inspections of financial records
- decisions, sales, or purchases
- payment of tax obligations
- violations or breaches of contract
- payment of employee salaries
8. Describe the Conditions Precedent
Conditions precedent state that the sales agreement depends on certain circumstances. Outline any conditions that must be true at closing for the business purchase to proceed. For example, the seller may require the buyer to secure a certain amount of financing before the sale can go through.
Our template has a field where you can describe your own conditions precedent in detail so you can clarify all expected terms.
9. Include Additional Clauses
Include any additional clauses, such as non-compete and non-solicitation clauses or confidentiality agreements. These clauses safeguard the buyer’s investment and maintain the company’s value. They also ensure that the seller doesn’t undermine the brand’s integrity by competing or revealing sensitive information after the deal concludes.
Business Purchase Agreement Sample
View a sample of a business purchase agreement template below to learn its structure. Once you study its format, you can use our template to create your own contract.
State-Specific Samples
Some states have unique laws and regulations that impact business purchases. Our state-specific business purchase agreement templates ensure compliance and address particular requirements that our standard agreement may not cover.
How Legal Templates Helps With Business Purchases
Looking to buy or sell a business? Legal Templates makes it easy. We provide a comprehensive business purchase agreement template that helps you accurately document the sale terms. Plus, we’ve included key protections, like confidentiality clauses and conditions precedent, to offer ample security as you proceed with your deal.
We guide you through each section of our template, ensuring you cover all your bases and write a legally sound business purchase agreement.
Frequently Asked Questions
Can I back out of a business purchase agreement?
Yes. In most cases, you can decide not to sign a business purchase agreement or send a notice of contract termination. However, some sellers may require you to sign a letter of intent or provide earnest money. If these safeguards are in place, you may lose your deposit or face other consequences if you withdraw from the agreement.
Who drafts a business purchase agreement?
Anyone can draft a business purchase agreement. It usually starts with the buyer and their legal team, as they have more at stake, but either party can initiate the drafting process. Once either party prepares the first draft, both parties can review it, negotiate, and make revisions before signing the final document.
Is a business bill of sale the same as a purchase agreement?
No. A business purchase agreement is more comprehensive and comes before the actual transfer of ownership. A business bill of sale is much less detailed and represents a receipt of the sale after closing is complete.
What are the tax implications of a business purchase agreement?
When you buy a business, you must understand how the purchase price is allocated among assets. The allocation affects the asset’s taxation and decides if you can deduct the assets on your tax return. Talk to a tax advisor to understand the full tax implications before finalizing a purchase.
