Purchase of Business Agreement
A Purchase of Business Agreement, also known as a Business Purchase Agreement or Sale of Business Agreement, is used when an individual or corporation purchases assets or a controlling portion (all) of the shares from a company. It specifies everything related to the purchase, including price, payment plan, warranties, and more.
A Purchase of Business Agreement is used during a business acquisition or asset sale.
Assets vs. Shares
Assets are the tangible and intangible property of a business that can be assigned a monetary value, such as client lists, contracts, office furniture, files, inventory, etc.
Shares are portions of ownership in a business that are divided among people and entitle them to profits in the company.
Can Assets be Excluded From the Purchase Agreement?
In a purchase agreement, you can choose to leave assets out of the sale. For instance, cash, securities, accounts receivable, and more can be excluded from the contract.
In your payment schedule, you will need to address the following for both the sale of shares and assets:
- Closing Date: the day payment is made and assets and/or shares are transferred.
- Deposit: the deposit is the amount of money put towards the price of assets or shares.
- Payment Options: the payment itself is how the buyer intends to pay the seller. It can be made in a lump sum, lump sum plus a Promissory Note for any outstanding amount, or a Promissory Note for the entire amount.
Pricing Shares and Pricing Assets
Shares can be valued according to two methods:
- Aggregate Purchase Price: also known as Aggregate Exercise Price, this is the entire price paid for all the shares.
- Per Share Purchase Price: this is calculated by assigning a single share price and multiplying it by the total number of shares to equal the total price.
Even if the purchaser is buying all of the assets from a business, each asset should be assigned its own price for tax purposes. Note that some assets may be taxable depending on your jurisdiction.
Warranties in a Purchase of Business Agreement
A warranty is a guarantee made by one party to another. You may choose how long each party is bound by the promises.
Each warranty serves a different purpose:
- Non-Competition: this clause ensures the seller does not compete with the purchaser for a set time period after the close of the purchase.
- Non-Solicitation: this prevents the seller from hiring former employees away from the buyer.
- Confidentiality Clause: this clause is intended to prevent the disclosure of proprietary information to outside parties.
- Statement of Environmental Compliance: this statement removes liability from a purchaser by declaring the buyer is in no breach of any environmental laws.
If needed, you can include additional warranties within your purchase agreement.
Confirming Representations in a Business Purchase Agreement
The party and seller can confirm their representations (statements of fact) through:
- Officer Certificate: an officer in a corporation or manager of a non-corporate entity.
- Legal Opinion: a lawyer who is hired as a third party to review the terms of the purchase.
What is a Condition Precedent?
The term "Conditions Precedent" means that certain obligations must be met prior to closing the purchase deal. There are standard conditions that both parties must complete before executing the Purchase of Business Agreement, which include confirming representations and warranties, as well as a series of other tasks in advance of the contract's closing date.