What to Include in a Purchase Contract for Buying a Business
What Is a Purchase Contract?
A purchase contract is a legal contract that binds the buyer and the seller of the business and outlines all the terms and conditions of the purchase.
It should include an identification of both parties, the full details of the purchase, the price, and the closing details—plus many other factors we’ll discuss below.
The purpose of this contract is to protect the interests of both the buyer and the seller and to prevent potential disputes.
Whether you’re buying the entirety of a business or a portion of its shares or assets, you need a purchase contract.
Key Factors of a Purchase Contract
Any purchase contract should include some key factors so that both the buyer and the seller are protected. An ironclad contract prevents future disputes and makes everyone’s rights and obligations clear.
Here are the key factors you should include in a purchase contract:
Buyer and Seller Information
Any contract should clearly outline each party involved in the transaciton. These two parties may be a client and a service provider, a vendor and a buyer, or a borrower and a lender.
In the case of a business purchase, the two parties are typically the buyer and seller (and sometimes the business itself), and it should be specified in the contract whether they’re corporations or individuals.
The contract should define the parties’ full names, contact information, addresses, and capacities.
Transaction Details
Transaction details include the financial terms of the agreement and the included assets. These should also highlight the legal fees and who’s responsible for them.
Assets and Liabilities
In an asset sale, as a buyer, you’re free to exclude certain assets that are for sale. As long as you reach an agreement with the seller, you can do what suits your needs, but everything should be included in the purchase contract.
If the seller wants to exclude certain assets from the sale, they must be outlined in the agreement. These assets could be anything from buildings to inventory, or intangible assets like patents and copyrights. They could also be financial assets like investments or cash reserves.
Likewise, if you’re excluding some liabilities like debts, outstanding loans, or creditors, they have to be highlighted in the contract, as well as any other inclusions and exclusions.
Pricing & Financing
This section should specify the agreed upon purchase price. The contract should also include the payment method, whether it’s in installments, a large sum, or loan notes.
If the buyer and seller agree that a chunk of the payment is to be delayed until a later date, they must have it in writing.
The contract should also specify whether a deposit is required, along with any possible price adjustments based on outstanding debts or other factors.
Aside from the pricing details, the contract should include the tax obligations and any other financial terms related to the sale.
Warranties
In a business purchase agreement, warranties are statements made by both parties of the contract as assurances to the other party.
For example, if the business is free from outstanding debts, the seller will include this as a written warranty in the contract to free the buyer from any responsibilities related to it.
Seller warranties are there to outline the legal authority of the seller, along with their compliance with tax legislation and asset ownership. They may also include assurances that the seller’s accounts are up to date, that they’re complying with employment law during the transfer, and that all transferred contracts during the purchase are valid.
Buyer warranties should highlight the buyer’s financial capability and legal authority. These warranties are mainly there to assure the seller that the buyer has enough cash for the purchase, whether it’s a one-time payment or installments. They should also assure the seller that the buyer will abide by all the contract’s terms, even after the transfer occurs.
If there’s a breach of the warranties outlined in the contract, one of the two parties could issue a warranty claim against the other.
Remedies & Disputes
Remedies in a contract are court-ordered compensations issued in the case of a contract breach from either party. The clause can vary greatly depending on the purchase details, but it mostly includes remedies and provisions for contract breaches.
The contract can specify the nature of said breach, whether it’s a minor breach, a material breach, or any other type.
Types of remedies can vary depending on the nature of the sale, but they’re mostly compensatory damages. That means that the breaching party will offer monetary compensation for the losses that occurred due to the breach.
Aside from the remedies, the purchase contract should also include the dispute resolution methods that the parties will use if needed.
This section is supposed to make it easier to resolve any potential conflicts between both parties of the contract, so it should outline the governing law and the parties’ obligations clearly.
Transfer and Closing Details
This section should include all the necessary documentation in the transfer process, plus any conditions that are required for the transfer to happen, like a deposit amount (from the buyer’s side) or paying off certain debts (from the seller’s side).
After specifying the transfer details, the contract should cover all the closing details, including the time, date, and logistics.
If the buyer wants help from the owner for the first couple of months after the purchase, this must be specified in the contract as well.
Signatures
When it's time to sign the contract, it’s always better to get two witnesses or solicitors and have them sign as well. However, that’s not a mandatory requirement for most contracts.
Benefits of Having a Purchase Contract for Buying a Business
Lower Chances of Future Conflicts
A purchase contract is primarily set in place to protect the interests of both parties, and this is its most significant benefit. When you get everything in writing, you reduce the chances of any future conflicts or legal issues.
The seller’s warranties will ensure that they keep up their end of the bargain, and your warranties will ensure that you’ll pay according to the method you agreed on.
Clear Rights and Obligations
The contract helps you protect your rights and makes sure you know your obligations, so the transfer is done smoothly without a hitch. Likewise, the contract assures the seller that you have the financial capacity to pay for the business you’re buying and that you’ll be able to pay on time.
Guaranteed Confidentiality
A purchase contract guarantees confidentiality for both sides of the transaction. If it includes a confidentiality clause, it’ll protect any sensitive information related to the business and prevent the parties from releasing it to third parties or competing entities.
Legal Proof
The contract will not only make the business transfer easier, but it also serves as legal proof of the sale details.
Tips to Follow Before Signing a Business Purchase Agreement
Before signing a business purchase agreement, you need to make sure the contract’s terms are suitable for you and that you’re not paying more than you should. That’s why you should have a due diligence checklist that includes all the necessary information to go through before buying.
It’s recommended to hire professional advisors to help you with the checklist, which includes going through the business’s financial data, employees' information, and legal papers.
After performing your due diligence and verifying all the company’s information, it’s time to consider what you want to include in the contract.
Aside from the key factors that we mentioned above, some additional clauses may protect both you and the business in the long term.
You also need to decide if you want to include a non-compete clause in the contract. Such a clause can protect your business in case the seller decides to become a competitor after selling.
The clause can specify that the seller can’t solicit the business’s customers after selling, which is one form of protecting your investment.
Final Thoughts
A business purchase agreement is essential to protect the buyer, protect the seller, and prevent any future conflicts between both parties. It also protects the business from data breaches and competition from the seller’s side.
What to include in a purchase contract for buying a business?
Buyer and seller information
Transaction details
Pricing and financing
Warranties
Remedies and disputes
Transfer and closing details
Signature
You may also choose to have additional clauses in the contract, like a confidentiality or a non-competition clause. Get in touch with Parr Business to ensure your purchase contract is complete and ready for use.
