A business sale agreement is an agreement through which a business is sold from one person to another. This agreement is entered into between a buyer and seller for the sale and purchase of a business. Through this agreement the buyer takes over ownership of the business from the seller. The agreement details what the terms of the deal are, the conditions under which the business is sold etc. This agreement is important as it gives solid evidence of the transaction and also clearly lays down how the payment is to be made by the buyer. It is an extremely important document as it sets out the agreed details of the deal and provides adequate protection to both the parties. This agreement gives the legal framework to complete the sale of the business and the parties are legally bound to act within the parameters set by such agreement.
This agreement is also known as a ‘business purchase agreement’.
Who Take the Agreement – People Involved
The people involved in a business sale agreement are the person who is selling his business (known as the seller) and the person who is purchasing the business (known as the buyer).
Purpose of the Agreement – Why Do You Need It?
The purpose of a business sale agreement is to lay down clearly the terms and conditions under which the business is sold. The agreement helps to make the sale formal and legally binding. It protects the interests of both the seller and the buyer. This agreement is necessary to give evidence of the sale having taken place.
Neither party wants to have any legal problems in the future or have a problem enforcing any obligation or duty that the opposite party is bound to perform. For this purpose, it is of utmost important that a well drafted business sale agreement should be created between the parties. Any act of either party that goes against the clauses of the contract will be considered a breach of the agreement and will be punishable according to the provisions of the contract.
The agreement will lay down whether there is any condition or covenant that the parties have to fulfil before the sale takes place. The sale will be completed only after these conditions and obligations have been fulfilled. It is important that these conditions are laid down in the agreement itself as it avoids any confusion between the parties and reduces the scope for any misrepresentation.
Contents of the Agreement
A business sale agreement contains the terms under which the sale of the business takes place. It is a very important agreement for any company. Generally, the buyer prepares the first draft of the agreement. This is then vetted by the seller who adds his own clauses to it. The representations and warranties is drafted individually by both the parties. Each party will try to reduce any warranty or guarantee on their part that will hold them legally accountable.
The agreement will contain the following important clauses:
- Details about the buyer and the seller
- Details about the business that is being sold
- The purchase price of the business and the manner in which the payment shall be made by the buyer
- If there are any liabilities attached to the business that will be assumed by the buyer
- Representations and warranties of the seller
- Representations and warranties of the buyer
- Covenants of the seller
- Covenants of the buyer
- Conditions precedent to the sale
- Post closing rights and obligations
- The method for dispute resolution between the parties
- The law by which the agreement shall be governed
- Process for amendment of the agreement
Each state has their laws and rules that apply to the sale of a business. For example, many states require that the creditors of the seller should be notified before the sale takes place. This is to protect the interests of all the stakeholders concerned. Hence, the parties must make sure that they are complying with all the applicable rules. The clauses of the agreement should be drafted such that there is no breach of any law or rule.
How to Draft the Agreement
The following are the steps to follow while drafting a business sale agreement:
- A letter of intent should be drafted to outline the terms agreed to by both the parties. This letter will contain the important terms that were negotiated upon by the parties and bring forth the intention and objectives of both parties. The terms of this letter are not binding and may be altered at any time before the final agreement is drafted.
- A due diligence should be conducted by the buyer to make sure the seller has a clear title to the business being sold and to assess what liabilities are attached to the business. The seller should also conduct a due diligence to verify that the buyer has the financial means to purchase the business and to run the business successfully. The seller may check the buyer’s credit record, his management experience and also enquire into the plans the buyer has for the company’s future operations.
- The business sale agreement will be drafted after the due diligence has been completed.
- Both parties should thoroughly review the agreement to make sure their rights and interests are protected.
- The agreement should be signed by both parties.
- Once the agreement is signed the ownership, security interests, etc. will be transferred to the buyer and the transaction is complete.
- The basic negotiation strategy is to ensure that the agreement is fair to both the parties and that their interests are protected.
- It must be negotiated such that the agreement is fair and balanced and benefits both parties.
Benefits and Drawbacks of the Agreement
The following are the benefits and drawbacks of having a business sale agreement:
- The agreement puts the terms and conditions of the sale
- into writing. This makes the transaction crystal-clear and avoids any misunderstandings.
- All the terms of the deal such as the purchase price, the conditions precedent to the sale, the liabilities that are attached to the business and other important details and obligations of the parties will be put down in writing. This reduces the scope for any disputes between the parties in the future on the terms that were agreed mutually between them.
- Through this agreement the seller shows how he is the owner of the business. The seller will submit documents and other material to show how he came to own the business and in what capacity he owns it. This gives faith to the buyer in the transaction.
- The agreement creates a formal and legally binding sale.
- A written business sale agreement will protect both parties in the event of any legal action. The courts can verify that a binding contract is in place by going through the clauses of the agreement and the actions taken by the parties.
- All the warranties and representations of the seller and buyer are spelled out. This protects the other party from any misrepresentations.
- Without such an agreement in place, a dispute between the parties could end up in court and lead to a legal mess.
What Happens in Case of Violation?
Generally, business sale agreements have a clause that talks about the actions to be taken when a party to the agreement breaches the clauses of the said agreement. Every agreement should have a detailed list of what acts or what omissions will amount to a breach of the agreement. When such a breach takes place, generally the non-breaching party can serve a notice on the breaching party asking them to remedy the breach within a certain specified time period. If the breaching party ignores the notice and does not remedy the breach, the non-breaching party can choose to take certain steps that will be provided for in the agreement itself. An arbitration clause is present in most agreements and states that if a clause of the agreement is breached or if any dispute arises with respect to the terms of the agreement, the matter will be resolved by arbitration. The clause mentions where the arbitration proceedings will take place i.e. seat of arbitration, the language in which the proceedings shall be conducted and the manner in which the arbitrators shall be appointed.
Alternatively, any other form of dispute resolution such as mediation or negotiation may also be mentioned in the agreement.
The agreement can also mention that all disputes arising out of the agreement will be subject to the exclusive jurisdiction of a specified court.
In conclusion, this agreement is extremely important when the sale of a business takes place. It lays down the terms of the deal and the conditions under which the sale of the business will take place. This agreement is used to stipulate the various conditions and requirements that the sale and subsequent purchase of the purchase will fulfill. Without such an agreement between the parties there will be no solid proof that the business has been sold and the parties will have very limited remedies if the other party does any act that goes against the terms that have been agreed to by the parties.
This agreement will also talk about any conditions that need to be fulfilled before the sale is affected. Having these terms written down is extremely beneficial to both the parties as it will avoid any miscommunication or confusion between them. Thus, a business sale agreement is a necessity whenever a party wishes to sell his business or a party wishes to purchase a business.