Preparing Your Purchase and Sale Agreement
The final stage that precedes the sale of a business is negotiating the purchase and sale agreement (or closing agreement). At this point, the buyer has made the decision to buy the business and completed a thorough due diligence investigation, while the seller has done their own due diligence and confirmed that the buyer has the financial means and capability to acquire and operate the business. Now both buyer and seller must iron out the final details on price, payment structure, price allocation (and tax implications), and all other details that make up the final deal.
It’s important to educate yourself ahead of time and know what’s included in a purchase and sale agreement, as well as what needs to be negotiated and when to rely upon the expertise of your attorney, accountant or broker. For simple business sales that involve only a few uncomplicated assets, a purchase and sale agreement downloaded off the internet may be suitable. For all other business sales, expect the agreement to be lengthy with numerous pages including exhibits and attachments. In either case, requirements may vary from state to state and your attorney should review your agreement to ensure it complies with the law of your region.
What Should Be Included in a Purchase and Sale Agreement?
- All parties involved should be clearly stated. A purchase and sale agreement should list the names of the seller(s), buyer(s), including any partners who hold an interest in the business. No parties involved should be able to escape from the contract. The signatories should include their name and titles. The business address should include each location.
- All items included in the sale. It should list all the assets to be included and excluded from the sale, such as fixtures, furnishings, equipment, machinery, inventory, goodwill, accounts receivable, business name, customer lists, cash, real estate and automobiles. It should also list all the liabilities being assumed by the buyer, including loans, debt and accounts payable.
- Closing date, purchase price and payment terms. The closing date should specify the date that the sale will close. The purchase price should include how the buyer and seller agree to allocate the price among IRS-determined asset classes. This should include details of how the price will be adjusted on closing day reflecting prorated business expenses, as well as any inventory or accounts receivable that may affect closing day valuations. The amount of cash to be paid should include the amount to be paid on closing day, the amount payable following the terms in the promissory note, and the amount to be paid in other defined future payments.
If part of the purchase price is to be paid through deferred payments, then a security agreement will be set in place that includes a description of the buyer-owned assets listed as loan collateral, and possibly personal guarantee requirements. Business operation requirements may be put in place to protect against business and asset devaluation before the price is paid in full.
- Any seller agreements. The closing agreement should include any type of non-compete or covenant not-to-compete agreement, management consulting agreement, or an employment agreement that will be signed by the seller as part of the closing deal.
- Representations and warranties. The seller’s representations and warranties is a statement that verifies that all the financial records presented by the seller fairly reflect the business’s financial condition, as of the dates of the statements. It also verifies the seller’s power and legal right to authorize the sale, as well as the seller’s clear and marketable title to the assets being transferred. It states the seller knows of no obligations or liabilities beyond those disclosed as exhibits included along with the purchase and sale agreement.
The buyer’s representations and warranties is a statement that verifies the buyer’s power and legal right to authorize the purchase, and it warranties that statements made by the buyer and buyer’s guarantors contain no untrue statements or omissions.
- Seller’s covenants and employee termination clause. The seller’s covenants, a statement of provisions that the seller undertakes to transfer the business should be included as well as an employee termination clause. The employee termination clause states that the seller will terminate all employees (except those who have transferable contracts) and pay all wages, commissions and benefits earned through the termination date. In many cases, the buyer will then complete paperwork to hire terminated employees through the buyer’s new business, which will have a new federal employee identification number.
- Default provisions and business transfer agreements. The bill of sale, assignment of leases, contracts, intellectual property, and stock transfer statements, should all be included in the sales agreement. A statement of whether or not brokers or finders were involved should also be included and should state how they will be paid. How the buyer and seller will pay professional fees and a statement of post-closing rights and obligations should also be included, allowing the seller to access financial records until the purchase price is paid in full.
What Happens Next?
Once the agreement has been settled, all parties involved will sign and date the document. If you are using an attorney, he or she should review the final draft before anyone signs. Each party should provide a witness signature, and each party should retain an original. All documents should be notarized by a notary public.
A purchase and sale agreement is a very detailed and complex document that takes careful consideration and planning. To be properly executed, it also requires the expertise of your attorney, accountant, or broker. Educating yourself ahead of time, including knowing what to expect and what needs to be included, will give you a head start on negotiations and finalizing the deal with the buyer.