A business purchase agreement outlines the terms and conditions of the purchase and sale of a business (or its assets), including:

• The exact nature and extent of what is being sold;
• The responsibilities of the parties before, at, and after closing;
• How and when responsibility shifts from one party to another, and
• What recourse either party will have against the other in the event things do not go as planned.

Think of it as a road map for the entire transaction.

A purchase agreement is usually preceded by a letter of intent (LOI) that outlines the fundamental terms of the parties’ agreement at a high level. After execution of the LOI, both parties will conduct due diligence before finalizing the purchase agreement.

Stock vs. Asset Purchase Agreements

A purchase agreement will generally take one of two forms:

1. A stock (or partnership interest or membership interest) purchase agreement, where the equity of the legal entity that operates the business is sold; or
2. An asset purchase agreement, where the buyer acquires most (if not all) of the assets used to operate the business. Such assets include both tangible assets (e.g., equipment, machinery, computers, and furniture) and intangible assets such as contractual relationships, intellectual property, and goodwill.

What Is Included in a Purchase Agreement?

Details typically included in a business purchase and sales agreement encompass:

1. Assets included in the sale. This includes a detailed list of all assets that are directly (in case of an asset purchase) or indirectly (in case of an equity purchase, where the entity owns the assets) included in the sale of the business, such as equipment, inventory, real estate, customer lists, social media accounts, contracts, goodwill, ownership interests in other entities, and intangible assets, to name a few. Parties often desire to specifically exclude assets from the transaction, which will need to be specifically listed in the documents and/or disclosure schedules.
2. Purchase price and payment. This includes the total amount being paid for the business or assets, the timing and structure of the payments, whether the seller will retain a security interest until payment has been made in full, and whether any further compensation could be owed to the seller based on the performance of the business after closing (i.e., an “earn-out” or similar provision). The concept of working capital is also important here, as the price may require adjustment on the closing date to reflect prorated business expenses and to reflect closing-day valuations if inventory and accounts receivable are being sold.
3. Closing date and deliverables. The summarizes the procedure and timing by which the transaction will close; and the documents, instruments, and tangible property required, such as consent actions, ancillary agreements, security instruments, resignations, third-party consents, financial statements, keys and access codes, assignments of contracts or permits, and any balances due to the seller.
4. Obligation for closing costs and fees. A statement of how the parties will pay professional fees involved with the sale closing, such as recording fees, broker’s fees, survey costs, franchise transfer fees, and attorney’s fees.
5. Seller’s representations and warranties. Purchase price notwithstanding, this is generally the most important section of a purchase agreement, as it sets forth in writing exactly what the seller is selling and what the buyer is buying.

This vital section contains written certifications made by the seller regarding the business and its past, present, and future operations, such as:

• The seller has a legal right to authorize the sale;
• The seller has clear and marketable title to assets being transferred;
• Financial records presented fairly reflect the financial condition as of the date of the statements; and
• The seller knows of no obligations or liabilities beyond those disclosed.

Representations and warranties will virtually always reference exhibits or schedules attached to the agreement, where, for example, material contracts, liabilities, litigation, insurance, permits, employee matters, audits, and other important details are listed out and/or described.

6. Buyer’s representations and warranties. While less vital to the transaction than the seller’s representations and warranties, sellers will want assurances that, for example, consummation of the transaction has been duly authorized and will not conflict with any agreement or arrangement to which buyer is subject, no brokers were involved in the transaction, and that the buyer has conducted satisfactory due diligence.
7. Assumption of liabilities. These include a list of any liabilities or obligations that are being assumed by the buyer as part of the sale, such as accounts payable, debts or lease agreements, taxes owed, employee benefit obligations, and outstanding litigation; also includes a statement that the buyer assumes no liabilities other than those listed.
8. Covenants. These are promises made by one or both parties to take (or refrain from taking) certain actions for a certain period of time. For example, a buyer may want a written commitment that the seller will operate the business in its normal course prior to the closing date; maintain the tangible and intangible assets of the business in a reasonably prudent manner; preserve employee, customer, and vendor relationships; or refrain from committing the business to substantial obligations in the interim period. Sellers, on the other hand, may want assurances that certain employees won’t be terminated after closing, or that protections in place for any outgoing directors or officers of the company will be maintained after closing. Moreover, where a transaction takes place during the middle of the year, the parties will want clarity on obligations such as filing tax returns, renewing permits, making governmental or third-party filings, including the seller’s assistance with certain aspects after closing.
9. Restrictive Covenants. These are promises (generally made by the seller) to refrain from taking certain actions after closing, most notably starting a business that competes with the recently sold one, or soliciting employees, contractors, customers, or vendors of the business to terminate their relationship with the company.
10. Employee matters. The agreement may outline the terms of the continued employment of company employees or their termination, including any obligations related to compensation, severance packages, or benefit plans.
11. Indemnification. The purchase agreement will likely contain provisions whereby one party is required to compensate the other party for inaccurate representations or warranties, or breaches of the agreement, and mechanisms for doing so. Also, the parties may negotiate a floor (or a cap) with respect to any such claims.
12. Dispute Resolution. The parties may desire to stipulate how any post-closing disputes will be resolved, the venue of any such actions, and whether alternative dispute resolution mechanisms (e.g., mediation, arbitration) will be required in certain circumstances.
13. Non-disclosure, non-solicitation, or non-competition agreements. These can include guarantees that the parties will not disclose confidential information or make disparaging statements about the other party; that the seller will not engage in direct competition for a period of time; or that the seller will not encourage employees or consultants of the business to terminate their relationship with the company.

Not all these elements will be included in every purchase agreement. Rather, each is tailored to the specific circumstances of the business being sold and/or to the needs of the parties involved in the transaction, especially in more complex transactions. An attorney well-versed in business transactions can structure a purchase agreement around your best interests and facilitate the transaction in the most efficient manner.