Purchase and Sale of Business: Drafting the Business Purchase and Sale Agreement
Once you’ve nailed down the terms of the acquisition (usually in a letter of intent), it is time to begin putting the terms into a formal agreement usually referred to as a business “purchase and sale agreement.” This agreement will spell out the seller’s and buyer’s rights and responsibilities with respect to the transaction. We’re continuing our series on the Purchase and Sale of a Business by highlighting some of the major considerations when putting together the business purchase and sale agreement for your acquisition.
Structure of the Sale: What assets and liabilities are included?
As we discussed in a prior post in this Purchase and Sale of a Business series, you’ll need to sort out whether the sale will be an asset sale or a stock sale. If it is going to be an asset sale, then the purchase and sale agreement is going to be extremely important for laying out the particular assets and liabilities you will be purchasing. If you fail to include an important asset or accidentally include a significant liability, then you could be left purchasing a far different company than you bargained for.
If it is going to be structured as a stock sale, then generally you’ll be purchasing every asset and liability of the company, so it can be less important to include specific details about each and every asset and liability that is part of the purchase. Nevertheless, there may be certain assets or liabilities that will be excluded from the transaction, and those should be specifically referenced in the agreement.
Purchase Price and Structuring the Payments
An obvious clause not to overlook is the clause detailing the purchase price and how the seller gets paid. Some transactions require a lump sum payment for the full purchase price at closing, with closing occurring several days after the purchase and sale agreement is signed. Others are structured with installment payments that will be paid over time to the seller—this is generally referred to as seller financing. Others may structure payments based on certain events, including the purchased company meeting certain financial goals. Including clear terms that detail the total purchase price and when the buyer is required to pay the purchase price to the seller is a key consideration when putting together your agreement.
Seller and Buyer Representations
One of the most important sections within any purchase and sale agreement is the representations and warranties section. This section includes statements from the seller and from the buyer about material facts associated with the transaction. If either party misrepresents a material fact, the other party may be able to unwind the transaction and sue for damages that result from the misrepresentation. Typically the seller will (at least) represent that (a) it has the authority to enter into the agreement, (b) it owns marketable title to the assets they are being sold, (c) it has no knowledge of pending claims against the company, and (d) entering into the agreement will not require additional third-party approval or breach any existing agreements. The buyer typically represents that it has the authority to complete the transaction and has obtained the necessary approval from any interested party to the transaction.
Purchase and sale agreements often include several closing obligations for both the buyer and the seller. For the seller, these obligations typically include delivering to the buyer a bill of sale, possession of the assets, and title to the assets being acquired. For the buyer, these obligations typically include delivering to the seller any payment that is due at closing (either the first installment payment, the full purchase price, or something in between depending on the terms of the deal), and signing any additional agreements that are part of the transaction.
Confidentiality, Non-solicitation, and Non-compete Provisions
Buyers may require that the seller agree not to discuss the terms of the transaction, solicit its employees, or compete with the company after the sale. For the non-compete to be enforceable, the scope of the non-compete must be reasonable—which generally requires the non-compete is limited in duration, geography, and the type of work. If limiting the seller’s ability to compete with the company or poach its employees is important, then it is key to spell out the non-solicitation and non-compete terms in the purchase and sale agreement.
Standard “Boilerplate” Contract Clauses
Many people overlook the importance of boilerplate contract clauses in a contract, and this can be a significant mistake if there’s a dispute that rises out of the transaction. Many of these “boilerplate” clauses include the terms regarding the composition and scope of the agreement and how disputes will be resolved. You should carefully read through and understand the consequences of each boilerplate clause in your business purchase and sale agreement to make sure you’re aware of how these clauses may affect your obligations.
If you enjoyed this post, please check out the rest of our series on the Purchase and Sale of a Business. If you’d like to learn more about drafting a business purchase and sale agreement when buying or selling a business, please feel free to contact us.