Once negotiations have concluded, and you and the seller have agreed to terms (price, transition, exceptions, payment terms, etc.), a legal contract is typically drawn up. This contract ensures that both parties' interests are properly protected, all terms of the agreement are outlined in writing, and helps to ensure that everyone involved has a clear understanding of both the deal and next steps.
You should consult with your lawyer for assistance drawing up the contract. Further, you should consult with them and your accountant on guidance on the tax and legal implications the transaction has for you, as well as advice on how you should structure the business.
Types Of Purchase Agreements
In a typical business sale there are two types of contracts:
- Purchase of the assets of the business (i.e. you purchase items of the business such as the brand, assets, customer lists, etc.). When buying assets only, it is easier to establish whether the assets are unencumbered. Further, you may be better able to ensure that you are not inheriting any potential liabilities that could be associated with the sellers business' past history (e.g. tax disputes, creditors, pending legal action).
- Purchase of shares in the business (i.e. you purchase all the shares in the business and, so, take over all its assets and liabilities). A share purchase means you take over the entire business including outstanding claims, legal actions, etc. Some sellers agree to provide legal indemnity, yet there is always the potential of exposure to future unexpected claims.
Always seek professional advice before you agree on what type of sale you want to proceed with and before signing.
Common Purchase Agreement Terms
The terms of the agreement work to protect both the buyer and the seller. They should be reviewed by both parties and legal representation.
Typically the purchase price will be broken-up and allocated so that specific amounts are allocated to assets, shares, liabilities, etc. You should seek accounting advice regarding allocations of assets, as this can have serious tax implications.
Type of purchase
Whether you are buying a business's assets or shares.
When and how you will pay.
Seller's involvement after purchase
Typically outlines whether there will be a transition and training period, and how long the former owner will stay involved with the business. It is not uncommon for some new owners to also employ the former owner for to assist with longer transitions.
Restraint of trade covenant
This protects you from loss of business by limiting the former owners ability to open a competing business within a reasonable proximity.
This section typically outlines any other potential outcomes and how they should be addressed. Common examples:
- Recourse due to material changes in the business prior to the sale contract closing.
- Outcome if it is determined that information provided by the seller during due diligence or disclosure was incomplete (e.g. higher than disclosed liabilities, incorrectly claimed assets, inaccurate financials, etc).
- Any subjects on the purchase due to approval of financing for the buyer.
- If there is a payment contract for purchase, stipulations for non-payment.
- Outcome of failure to meet any of the other terms of the agreement (buyer or seller).
Any other conditions
This section covers all other items agreed upon between you and the former owner. It can include stipulations for existing employees, a detailed transition plan and agreed upon actions prior to transition, amongst other items.