Outlining the Business Purchase Agreement: A Simple Guide

In Post #31, I answered the question, “What is a purchase agreement for a business?” Now, I need to show you what an actual business purchase agreement looks like. Since you know that you have certain protective terms and conditions to include, you need to know where to put them. Yes, this document can protect buyers and sellers. However, it does so much more than that. Essentially, the purchase of business agreement outlines and answers everything about the business’s sale.

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Podcast Time Index for “The Purchase Agreement”

00:32 – The Documents & The Terms, part 2
00:39 – The Purchase Agreement
04:15 – Agreements included in the final Purchase Agreement
05:09 – Things to review
05:26 – Transfers
05:58 – Taxes
06:08 – Representations & Warranties
06:41 – Covenants
06:58 – Conditions
07:18 – Payments and Closings
07:53 – Miscellaneous
08:29 – Consult with your Team
10:10 – Appoint a Coach
11:22 – Keeping on track

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On a Friday evening around 7:00, I was walking down the beach in South Georgia when my email chimed. It was here… the draft of the purchase agreement for my company. As I began scrolling through the document on my Blackberry, I had two specific thoughts. First, I thought, “Holy Batman! This thing is crazy long. I mean, it’s book-length!” The second was, “I’m SO glad I have a superstar attorney who can review this thing in detail and tell me what in the world it all means.”

Rely on Your Team, but Read for Yourself

I’ve seen many, many business purchase agreements over the years as a CFP^®, as a CEPA, and as a business owner. Yet, I am still surprised and amazed at the length of these documents. The longer I’m in business, the longer these documents seem to get. A final business purchase agreement will likely include 10 to 20 different types of agreements, from employment agreements to non-solicit agreements to consulting agreements. Easily, the final stack of documents could include 200 to 300 or more pages of legal jargon. That’ll make you want to give up pizza. It’s that depressing.

I remember the first business purchase agreement I held in my hands. Like any seller, I took out a highlighter and commenced reading every line. After about 15 minutes, I surveyed my markings only to notice that just about every page had a note or a question. Laughing to myself, I realized that I didn’t need to know everything in the document. That’s why I hired people. It’s their job to make sure I’m protected.

However, I do want to understand what I’m signing. I don’t want to be so worn down by the due diligence and sales process that I sign whatever is placed in front of me. After all, if I go to court over something related to my business or its sale, the attorney on the opposing side will say, “Mr. Goodbread, did you ever read this document before you signed it?” If I haven’t read it, nothing I say matters after I say, “No” or “Not thoroughly.”

Sections That Can Appear in a Business Purchase Agreement

Yes, you will rely on your attorney to handle most of the terms and conditions. However, you need a cursory knowledge of what should be or could be in the business purchase agreement. That way, you can review it for mistakes and gain a thorough understanding of it before you get to the closing table. In no particular order below, I’ll provide a list of sections that can be included in a business purchase agreement. Some lawyers will combine the sections I’ve listed, or they’ll include information I’ve put in one section in a different section. But essentially, each segment of the purchase agreement explains the who, what, when, where, how, and how much of the business sale.

Description of Parties

The Description of Parties appears at the beginning of the document. This section should be brief but thorough. Your Description of Parties section details things like the legal names, phone numbers, and addresses of the parties involved. Basically, this section serves as a contact list.

Description of Business

The Description of Business is sometimes referred to as the Sellers’ Representations and Warranties. It provides detailed information about the purpose of the business. Additionally, the services and products offered by the company will be featured in this section. Likewise, you’ll want to include the entity type that your business operates under, management structure and systems, customer demographics, and past, present, and future financials.

Description of Sale

Absolutely vital to the purchase agreement, the Description of Sale identifies the type of sale (Asset, Stock, Earnout, etc.), a description of every asset included in the sale, as well as a full description of those that are not included.

Transfer of Property

This section hinges upon the description of sellable assets, stocks, and items. Your business purchase agreement’s Transfer of Property section should provide clear details surrounding the seller’s Agreement to Sell all of the listed stocks, assets, and tangible items. Similarly, it should outline the buyer’s Agreement to Purchase each of the listed assets.

Purchase Price

Once the document identifies what is and isn’t included in the business sale, the purchase agreement should move on to outlining the price buyers are paying for each listed asset. Equally important is the information that details how the buyer will pay for the business. This could include outside financing, seller-carried notes, seller employment, or even stock buyouts.

Assumption of Risk and Liabilities (sometimes one-and-the-same as Covenants)

It’s important to be sure of which party will assume responsibility for the risks and liabilities that could occur before and after closing the deal. Things to consider include, product loss, tax liabilities, loan and vendor obligations, employee salaries, etc. This must be made clear and be agreed upon by both parties. If even the smallest detail is left out or contested, it could cause major problems down the road.

Covenants (often split into Buyer Agreements and Seller Agreements)

If separated from the Assumption of Risk section, many of the protective clauses mentioned in my post titled, The Many MANY Ways a Purchase Agreement Protects Both Seller and Buyer, can appear in this section. In particular, you should be on the lookout for indemnification agreements, business conduct agreements, as well as non-compete, non-solicit, confidentiality, and intellectual property agreements.

Transition

Oftentimes, lawyers wish to include a Transition section in the business purchase agreement. This prevents parties from abandoning responsibilities after closing. Use this opportunity to clarify the seller’s role within the business after the sale. Additionally, you can determine who will train the new owners, as well as make it clear who will notify vendors and customers of the business’s transfer.

Participation or Absence of Brokers

If the buyers and/or sellers have engaged a third-party facilitator during the sale process, the business purchase agreement should include the legal names, titles, and addresses of any third-party facilitators who were involved in the sale of the business. Likewise, it should determine which party is responsible for the facilitator’s fees. As such, you should also include information about how much they will be paid and what they did to earn their wages.

Conditions

Often tied to the Closing section, the Conditions section details what must take place before parties are obligated to buy or sell the business. For example, one of the parties has come to the satisfactory completion of due diligence. Likewise, the Conditions section defines any conditions that could release buyers or sellers from their obligation to purchase or sell the business.

Closing

The Closing section is usually one of the more easily understood sections of the business purchase agreement. It simply states the time and location of the closing, what monies will be paid upon closing, and issues title transfers.

Miscellaneous

While many sellers believe “miscellaneous” means “not important,” that is far from the truth. Your Miscellaneous section can reveal the purchase price allocations. Additionally, this section outlines how disputes will be resolved and how to adjust the purchase price to reflect prorated business expenses, inventory, or accounts receivable on closing day.

Signatures

Appearing at the end of the document, the buyers and sellers will sign their agreement to the terms and conditions outlined in the document. A representative attorney, banker, broker, or CEPA in attendance at the closing will also sign as a witness and notarize the buyer and seller signatures.

Exhibits/Appendices

Attached to the purchase agreements, any of these documents can be included in this section:

• Financial statements and reports
• The Letter of Intent
• Signed agreements
• Leasehold agreements/transfers
• Vendor agreements/transfers
• Asset valuations
• Owner and/or employee biographies
• Industry reports
• Marketing plans and contracts

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The Ultimate Sale – the book that takes the Building A Sellable Business blog/podcast series to the next level.

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Assign Roles to Your Team Members

Whew! I didn’t even list all of the sections that can be included in a purchase agreement, and I’m tired!

After you do your own review, you’ll want to gain insights from your exit team. Everyone – your attorney, your transition specialist, your CPA, your CEPA, and your CFP^® – will need to be on the same page. But while you’ll need input from each member, you need to designate one person to act as the play-caller here to prevent head-butting, frustration, and stagnation.

In my experience, the attorney is best suited to facilitate any changes needed and to make the final call on terms and conditions within the purchase agreement. But if you’re working with a razor-sharp attorney, he/she shouldn’t have ego issues. Instead, he’ll listen to insight from all the other professionals with respect.

With that said, you’ll also need to task another exit team member to play quarterback and keep the ball moving down the field. Just as I usually ask an attorney to step into the coach’s role here, I normally ask the CEPA to fill this position. Oftentimes, he has the knowledge necessary to prevent continuances and keep other team members (buyers’ and sellers’) on task and on schedule.

So, friends, we’re in the thick of selling your business. If your team can withstand the due diligence process, you’ll get to the closing table! Join me in the next post!