A Purchase of Business Agreement refers to a contract that transfers the title of a business. The contract highlights the conditions of the sale, the things included or excluded from the price of the business, and optional warranties and clauses for protecting the buyer and seller after the business deal has been finalized. Read on for coverage of the distinction between the purchase of assets and that of a business, and the different sections of a purchase agreement.
Purchase of Assets
The purchase of a business’s assets is different from the purchase of a business. In the former you are buying a certain aspect of the business and not the entire business. This may include buying a product, intellectual property, or a client list. Some of the items defined as assets include equipment, sales orders, inventory, books, records and files, business contracts, goodwill and the name of the business, and trademarks. Assets do not include securities, accounts receivable, cash or bank balances, and excluded assets.
Every word or term featured in the purchase contract is defined in this section. Terms like “Net Working Capital” or “Adjusted EBITDA” are ambiguous words that need to be clearly defined in a business agreement. Poor definitions present problems in future when sellers and buyers disagree on issues such as working capital or purchase price adjustments.
This part of the agreement deals with all or some the following: the price of the purchase, payment terms, earn-out targets, purchase price adjustments, and escrows. Purchase price may include buyer’s stock, seller financing, or cash and other items. For example, if a public company buys a business, the need to determine the value of the company’s stock will arise.
Representations, Warranties, and Schedules
In this section, the buyers and sellers will state that particular facts and conditions are true at the time of the sale. Representation, warranties, and schedules are to a large extent aimed at protecting the seller. It is important at this stage that the seller involves a lawyer to be on the safe side since there are a lot of terminologies involved. The four restrictive warranties included in many business purchase agreements include non-competition, non-solicitation, environmental compliance, and confidentiality.
Indemnifications lays out particular actions of one person, or events brought by that person that damage the other person involved in a contract. Indemnifications are mainly meant to protect the buyer. The buyer protects themselves against liabilities that may arise from the seller’s actions and simply requires the seller to commit to compensate them for damages. The pertinent issues arising from indemnification include the limit of the actions indemnified, damage caps, the party responsible for indemnification, and the duration of the indemnification period.
Interim and Post Closing Agreements
These covenants deal with the way buyers and sellers promise to carry out business before and after the deal is finalized. Some of the standard requirements that sellers face include no purchases above a certain amount, no granting of salary increases or bonuses, and no hiring of new employees.
These are a list of events that should have taken place, or items that should have been delivered, before the parties to a purchase contract seal the deal by exchanging their signatures. Closing conditions can include written consents from the seller’s vendors, customers, and landlords. They also include regulatory consent e.g. government issued permits or licenses. The seller’s lawyer is involved with ensuring that the seller meets the closing conditions before the set date. In some cases, the transaction may be finalized without meeting all the conditions. However, this only occurs at the discretion of the complying person and may come at a steep cost.