Our purchase or sale agreement template is a jumping off point for crafting a sale agreement between a business buyer and a business seller.
A Purchase or Sale Agreement (we'll use "Purchase Agreement" throughout) documents the purchase of a business, but the agreement can go by many names.
The purchase can either be of assets of a business or of the actual shares. In small business acquisitions, it's most commonly structured as an asset purchase. However, some transfers or acquisitions may be structured as a share purchase.
This agreement nearly always follows a Letter of Intent, if the diligence period goes well. However, some acquisitions occur without an LOI as part of the deal process.
You should use a purchase agreement once the buyer has completed due diligence on the business and both parties are in agreement with the price, structure, and contents of the purchase.
For a buyer, this is typically the last step before the closing. For the seller, this is their final negotiation before handing over the reigns to their small business.
A purchase agreement is just as flexible as a letter of intent. Depending on the complexity of the business and transaction, it can range from a few pages to many pages. Below are some of the common sections for small businesses with explanations of the purpose of these clauses.
The basic description of the deal will be laid out near the beginning of the agreement. This is typically the "What?", "Who?", "When?" and "How?".
What? Normally within a deal, certain assets are purchased while others are excluded. For instance, some buyers may only want the customer list (e.g. a purchaser of a CPA firm), while others want everything except outstanding loans tied to the old business.
Who? This will be similar to previous agreement templates we have insofar as who is purchasing from whom. The buyer and seller will be clearly defined.
When? The effective date of the purchase - this is done at closing and when everything formally transfers over to the new owner.
How? This covers not only the structure of the deal but the payment terms. Is a component of the purchase price seller financed? Are there earn-outs?
Representations and warranties (commonly called, "reps & warranties") are a set of statements and assurances to help determine the quality, nature and risks of the acquisition.
The covenants are a collection of promises made by the seller to the buyer. Another way of paraphrasing convenants is that "these are a set of promises we promise to do (or not do), both before and after the effective date."
A common covenant is that the seller will continue to operate the business as usual between now and closing. This avoids a situation where the seller checks out and the business takes a material hit in revenue or customer retention.
Typical conditions needed to close include the availability of financing, the successful transfer of the lease, any potential regulatory approvals, and compliance with the covenants stated above.
Indemnification covers what the seller will pay if a representation is incorrect or she fails to deliver on a covenant. This is typically the most jargony of sections but it's also quite critical. For buyers, it provides some recourse in the event of a dispute, however, the seller will typically want to cap indemnification by a certain time period and dollar amount.
In addition to the basic clauses in a Purchase Agreement, there may be ancillary agreements that serve as exhibits or appendices. Some of the common ones are below: