What Should Be Included In A Business Purchase Agreement?

What is a Business Purchase Agreement?

A business purchase agreement is a contract that sets out the conditions of a business sale between a buyer and seller. It clearly states which assets the buyer intends to purchase, so relates only to asset sales, and not share sales.

Read more about asset sales vs share sales.

A business purchase agreement will need to include everything from the assets to be included in the sale to the final purchase price. As a legally-binding document it serves as a record of the intentions of both the buyer and the seller. The main clauses that are often included are:

Details about assets

An asset sale and purchase agreement will detail which assets the buyer is intending to purchase. This gives them more flexibility in choosing which items to acquire and which to leave with the seller. The business purchase agreement must be completed correctly in order to ensure that the terms of the sale are absolutely clear.

Assets typically include: equipment, stock, software, social media accounts, intellectual property, domain names, employees. etc. It’s important to define everything to be included in your agreement for sale and purchase of a business. Failure to do so could lead to costly disputes in the future.

The purchase price

A business purchase agreement will need to include the price to be paid for the business and assets, and a timescale for payment. It might state that the valuation will be paid in a single lump sum, or in regular instalments. A payment mechanism will need to be established to ensure that both parties understand what is expected of them going forward.

Completion date and tasks

The date of completion must be included in your asset sale and purchase agreement. This clause sets out when the buyer will take over and what actions are expected of the seller. These actions commonly include delivering any contracts, leases, records, or other documents from seller to buyer. 

Warranties

When included in a business purchase agreement, a warranty acts as a promise from the seller about the condition of the business and its assets. Warranties give the buyer confidence that, should any of the assets included in the sale not meet predefined standards, they have future recourse. It’s fairly common for warranties to be used post-sale to reduce the valuation of certain assets rather than claiming for damages due to breach of contract. 

Warranties typically included in an asset sale and purchase agreement can cover:

• General: The seller having the right to sell the business
• Financial: The seller’s accounts are up-to-date and there have been no adverse changes since the last account date
• Assets: The seller owns any assets being transferred in the sale
• Contracts: Any contracts being transferred are valid and not subject to termination 
• Legal: The business has complied with all relevant rules and regulations
• Equipment: Any equipment being transferred belongs to the seller and is not part of a third-party arrangement listed elsewhere
• Employees: Has the seller complied with all facets of employment law during the transfer?

One final factor that is often included is confidentiality. Important information can change hands during a business sale, and this shouldn’t get into the public domain. Including a confidentiality clause in your asset sale and purchase agreement will ensure that any sensitive data remains secret.

Along with the fundamental factors of assets, contracts, etc, there are other elements that might be included in a business purchase agreement. Many of these are required to ensure the Transfer of Undertakings Protection of Employment rights (TUPE) are fulfilled. Further factors in an asset sale and purchase agreement may include:    

Employees

If employees are being transferred to the buyer, relevant clauses will need to be included in the business purchase agreement. As the transfer will trigger TUPE, the seller will need to confirm in warranties that they have met TUPE obligations. They will also need to pay all necessary wages and bonuses as set out in employee contracts. 

Restrictions and covenants

It’s common for the buyer to ask a seller to agree to non-compete agreements before completion. This might mean that post-sale, the seller cannot hire or approach existing employees, customers, or suppliers in relation to a new venture. These kinds of restrictions are usually applied over a set timescale to ensure that the buyer doesn’t have to compete against the previous owner in future. 

Book debts

When book debts are included in the transfer of ownership, additional clauses may stipulate how those debts are handled. This type of debt can include sums owed to the seller for past services and any loans the business may have taken out.  

Stock valuation

If stock is being transferred to the seller, there should be a mechanism in the business purchase agreement for valuing that stock. It can also be helpful to include a process for handling any disputes between seller and buyer over the results of the valuation.

What are the benefits of a Business Purchase Agreement?

A business purchase agreement is essential because it provides a legally binding framework that protects the interests of both the buyer and seller. It minimises any risks, clarifies expectations, and ensures that the transaction is conducted in an organised and transparent manner. It also acts as a critical document that can help to facilitate the successful transfer of a business from one party to another.

Seeking advice when entering into a business purchase agreement is crucial as business and legal professionals can provide specialist expertise across mergers and acquisitions, contract law, due diligence, and negotiation. This not only safeguards the buyer’s best interests but also ensures that the agreement complies with all relevant laws and regulations. 

Legal professionals can play a pivotal role in identifying and addressing potential issues, preventing disputes, and providing a structured framework that can result in a more successful and legally sound agreement.