Ins and Outs of a Business Purchase Agreement

Have you ever thought about buying a business? If you do at some point your going to be asked to sign a purchase agreement. (You will bring it to an attorney for review, correct?)

Often first time buyers or sellers are unfamiliar with what is covered in a typical purchase and sale agreement.

For most people the first time they see such a document is when they are selling their business or buying one for the first time. Like most legal documents reading them without understanding the legal significance of the words can lead to problems down the road. Too often people contact us and tell us the document “seems okay.” Maybe it is…or maybe not.

A Definitive Purchase Agreement (DPA) is a legal document is used to transfer the ownership of a company. In short, a DPA is used when two parties enter into an agreement for a merger, acquisition, divestiture, joint venture or some other form of alliance. This binding contract includes all the terms and condition under which the merger, acquisition, etc. will take place, and includes assets to be purchased, purchase considerations, representations and warranties, closing conditions and more.

There are two types of DPAs — a Share or Stock Purchase Agreement or an Asset Purchase Agreement. In a Share Purchase Agreement, the seller transfers the shares of the company into the name of the buyer. In an Asset Purchase Agreement, the individual assets are transferred to the buyer, rather than the entire company. The seller remains the owner and the buyer merges the assets into his existing company or forms a new company.

You should expect the following clauses to be included in a DPA:

Purchase Consideration — what the buyer will pay to the seller, any adjustments made to purchase price and why, timeline of payment(s), earnest money deposited in escrow, any third-party financing, required working capital, etc.

Representations and Warranties — seller states or represents the true facts about the company and then warrants that the statements are true.

Limitations of Representations and Warranties — the seller can add limitations to the representations and warranties including how long warranty period lasts (the seller won’t represent of warranty past a certain date), disclosure schedules and more.

Indemnification Clauses — this clause says that if the seller has failed to disclose a liability, he or she will pay a huge fee.

Closing Conditions — generally, there is a gap between signing and closing of deal, during which certain conditions must be met by both parties for a successful closing.

Miscellaneous Provisions — may include things like required inventory levels at time of closing, dispute resolution in case of problems, penalties to buyer or seller if deal falls apart, who pays the fees to banker, attorney, etc.

Purchase Agreements can be complicated and certainly require an experienced business attorney to help protect a your interests. Poulos Law Firm has more than 30 years of experience helping individuals navigate through these transactions.

SMALL BUSINESS LAW – We can help you with every aspect of your business including business formation and organization, business negotiations, business planning, transactional business law, purchase and sales of businesses, and business litigation, as well as succession planning with wills, trusts and buy sell agreements.

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