A Brief Introduction About the Business Purchase Agreement
The event of buying or selling of a business warrants a Business Purchase Agreement. It is an agreement between the purchaser and the seller or the owner of the business. Also known as a Business Transfer Agreement, it contains the terms and conditions of the transfer of business, the roles and responsibilities of the parties involved, the valuation of the business, the inclusions and exclusions in the deal, and other information about the transfer.
It leads to the formation of new management for the organization and affects the systems in business. The employees, shareholders, third-party vendors, etc., are all affected by the sale, and the agreement provides the means of a smooth transition.
It enables both parties to agree upon the different terms and the procedure of the transfer and plan for the future functioning of the business. It provides for certain restrictions on both parties in the interest of the company. It also serves as a legal document for the transfer of the rights of the business.
In some countries, a Business Purchase Agreement is mandatory for certain companies.
Who Takes the Business Purchase Agreement?– People Involved
The agreement is executed between the owner of a business and the purchaser. It is a document wherein both parties agree to the various terms of the sale of the business.
The agreement also holds the owner responsible for all the events that have taken place before the closing date of sale.
In the case of a Family business or a Small Business Purchase Agreement, the agreement may bind the legal heirs of the owners in the event of the insolvency, death or other conditions upon which the owner may be unable to carry out the responsibilities laid out in the agreement.
Purpose of The Business Purchase Agreement– Why Do You Need It?
The primary purpose of the business purchase agreement is for the buyer and seller to both agree to the terms of the sale. In the purchase of a business, many factors are involved.
The parties must agree to the value of the business, the method of computation of the value, the cost at which the assets are going to be taken over, which of the parties will take on the settlement of the liabilities, the continuation of the current employees and, other conditions according to the transfer.
For a smooth transition in the operations and functioning of the business, it is imperative that all ambiguity is removed from the transaction and that it is documented.
The agreement also protects the concerned parties in the event of any non-performance of obligations associated with the transfer. It holds the previous owners responsible for all events and litigations against the business before the closing date of sale.
Further, the corporate laws of some countries mandate the execution of this agreement in the event if the sale of a business.
Contents of the Business Purchase Agreement
The contract mainly involves an agreement on the terms of transfer between the parties. It must include the following:
- The legal names, addresses, and contact details of the concerned people.
- The details about the business, its location, the purpose of the business, products, or services sold, ownership details, management, and also the financial information of the business.
- The closing date of the sale of the business. A clause stating that the events before this date would be the responsibility of the old owners.
- The description and reasons for the sale/purchase.
- A schedule of the assets and liabilities that are being transferred and the ones that are not. The inclusions and exclusions must both be explicitly stated.
- Agreement to the transfer of the assets and the valuation technique and price of the transfer.
- Details on the assumption of the risks and liabilities. A distinction must be made for all the liabilities and which party is to take responsibility for the same. These include taxes, loans, employees’ salaries, etc.
- Restrictive clauses for non-competes, confidentiality, non-disclosure, and the protection of the intellectual properties of the business.
- Conditions for sale to take place.
- Plans for the continuance or termination of the existing employees of the company.
- Rights, responsibilities, and other contractual obligations of the parties.
- Transition roles of the parties. This includes the training of the new employee, the transfer of all knowledge to the new owners, informing the vendors and other third parties, etc.
- Details of the proceedings at the time of closing the deal.
- Measures to resolve any conflicts that may arise and the proceedings in the case of any breach of the agreement by either party.
- Signatures of the parties in agreement with all the above clauses.
How to Draft the Business Purchase Agreement?
When writing a business purchase agreement, you should keep the below-mentioned points in mind:
- It needs to provide a comprehensive view of all the terms of the transfer, valuation of the business and the assets, roles of each member in the transition, takeover of the liabilities of the business, and other conditions relating to the matter.
- The information on the valuation and pricing is essential from a legal and as well as a financial viewpoint and must cover all the necessary aspects.
- The concerns that may arise for either of the parties must be addressed.
- The transition events, according to the sale, enable a smooth flow of business and should be worked out accordingly, keeping the best interest of the business in mind.
- The restrictive clauses must be well-drafted and be within the scope of the other policies of the company and the laws of the state. No agreement can overwrite any laws.
- Conflict resolution measures must be discussed to avoid business disruptions.
While negotiating the terms of the contract, both parties should discuss the terms concerning them individually and jointly.
The buyer must gather all the knowledge about the industry and the business. The seller, on the other hand, must collect information about the buyer. They both can commission a due diligence report from an external source.
Apart from that, they must also focus on the terms being agreed upon. The transaction is generally handled by an independent third-party broker who can value the business in an unbiased manner.
Further, for the smooth running of the business amid these significant changes, the buyer and owner must discuss the transition and allocate responsibilities between each other and have a plan for continuance of business in place.
Lastly, the closing date of the sale must be established as it marks the distinction between the old management and the new management.
Benefits & Drawbacks of a Business Purchase Agreement
A sale agreement is as important to the business as it is to the owner and the buyer. It also contains information important to other parties with interest in the business who include the employees, creditors, loan providers, and the vendors.
There are many benefits to having a business purchase agreement in place:
- It is a sound business practice to document important events.
- It provides some ground rules for a steady transition in roles and the operations of the business.
- It reduces disruptions that can take place on account of significant changes in the business environment.
- It gives an outlay of the duties of all the people involved and provides clarity on the functions of the company.
- It allows for better management as it helps provide the necessary information for making decisions.
- Moreover, most importantly, it protects the parties involved and provides for measures to resolve conflicts.
Some of the drawbacks of a business purchase agreement are listed below:
- The contract can be too specific.
- It involves a lot of time and money to execute.
- It is a long-term agreement.
- It may cause some disruptions in the business.
- If not composed well, it may fail to give the advantages stated above.
What Happens in Case of Violation?
A violation of the business purchase agreement can occur in many ways. It could involve a sale of the business to another party, failure to deliver items agreed or the delivery of the wrong things, inability or refusal to pay the amount, or even fraud.
In the case of the breach of agreement(1), the conflict may be resolved in a manner provided by the contract.
For further issues, the agreement may be presented in court for legal action. The parties can claim monetary compensation, termination of the contract, and can sue for damages.
A business purchase agreement is an essential document and provides a record of all the terms of a sale/transfer of business.
It provides instructions to be followed during the transfer of ownership and enables the business to run smoothly.
It also protects the parties in case of non-performance of duties by the other party and provides methods for dispute resolution.