A business purchase agreement is a formal document evidencing the transfer of ownership of an ongoing business from one party to another.
The purchase agreement will include, for example, a statement that the selling party has and will transfer all assets related to the business (goodwill and physical property) to the buyer at closing. The purchase agreement also defines the rights and responsibilities of both parties involved in the transaction.
Why is a Business Purchase Agreement Needed?
A business purchase agreement form protects businesses and the individuals involved in transferring ownership from any challenges after closing. The legal framework provided by this document helps resolve disputes regarding the sale of certain assets, shares and shareholder control, etc., such as between buyers and sellers. A business purchase agreement protects sellers by providing them with a forum for handling disputes with the buyer that help avoid the involvement of mediation or arbitration. In addition, the seller may use the purchase agreement document to show that they indeed changed the ownership of the business and that any dispute arising after the sale is the responsibility of the new owner.
Business Bill of Sale VS Purchase Agreement
A business bill of sale is used to execute the transfer or sale of a business. It outlines the terms of the transaction at the time of the sale/transfer and officiates the new ownership of the business.
A purchase agreement, on the other hand, is used to negotiate future sales or purchases. Purchase agreements are usually used during the initial phases of negotiation for securing assets and establishing the terms of the sale/purchase of a business.
The critical difference between a bill of sale and a purchase agreement is that a business bill of sale becomes legally binding after the transaction is completed. In contrast, a purchase agreement is only a draft or promise of a sale/transfer and does not recognize new ownership or transfer of a business.
Importance of Business Purchase Agreement
Having a business purchase agreement ensures that both parties have created enforceable obligations, rather than just relying on one party to do their part diligently. There are four primary reasons why businesses need to prepare and sign a business bill of sale for their sale. These reasons include:
- First, a business purchase agreement ensures that the transaction is handled correctly from beginning to end. This includes all assets and liabilities and things like patents and trademarks for products or services provided by the company.
- Second, a business purchase agreement protects each party involved in the transfer of ownership should there be any challenges after the sale. Finally, the purchase agreement is necessary to establish obligations and responsibilities of both parties involved, thereby keeping all parties updated and aware of what is required of them.
- Third, a business purchase agreement is an essential step in helping to create or maintain relationships with customers and suppliers. For example, when one organization buys another, many parties need to be contacted regarding the purchase. By signing a purchase agreement, both organizations can ensure all legalities were followed correctly from beginning to end and that all the parties are aware of the transaction.
- Finally, the most significant importance of a purchase agreement is that it protects the future relationship between the buyer and seller. It does this by ensuring that there are no outstanding issues, thus removing a source of conflict for parties involved in a purchase or sale.
How to Write a Business Purchase Agreement
Key components must be included in a business purchase agreement to ensure the document becomes legally enforceable. Below is a step-by-step guide on how to capture all these components in the business purchase agreement:
Step 1: Date of Sale
Most states require that the date of sale be included in the business purchase agreement. The date of sale is when the business transaction took place, i.e., the month and years in which the sale occurred. It can be a few days or months after the actual purchase of property, assets, or shares, but it should be close enough to provide an accurate timeframe for when the transaction happened.
Step 2: Seller’s Information:
The seller’s information will include the full name of the person selling their business, how he/she wants to be referred to in the agreement, nationality, date of birth, their main phone number, email address, and mailing address.
Step 3: Business Details
The business details section is the most critical component of the business purchase agreement. This section should be detailed and should include;
- The company’s name and business ID number should also be included in this section if applicable.
- The business address and registered office address.
Other things that should be captured under this section include:
- State of Corporation: The corporation section is used to indicate where the company’s headquarters are and where the business’ registration is located.
- Address of Business’ main headquarters: This component explains where the business headquarters are located and may be different from the registered office address included in step 3 above
- Asset, Shares, and Personal Property and other Interests: This section is used to detail and itemizes all the assets, shares, and personal property which will be transferred as part of the sale. It can also include other interests such as copyright or royalty for patents.
Step 4: Purchase Information
In this section, one can include the full details of when and where the transaction took place and the payment method utilized. In this section, two main things should be captured. They include:
- The Purchase price: The actual purchase price that was paid for the business or the assets. This can include what was paid to acquire goodwill as well as stock, property, etc.
- Buyer’s information: This section should detail who initially owned the business and its assets and buy the business and its assets. The full legal name of the buyer and how he/she wants to be referred to in the agreement (if not a sole proprietorship).
- Date of transaction: This section should include a date to show when the transfer took place.
Step 5: Warranties
The section ‘Warranties’ captures the promise that both parties make when they complete the sale of the business. It can include a list of warranties, including an indication of how long it will last and what is covered in the agreement.
Step 6: Signatures
The final step of writing the business purchase agreement is to get the participants to sign and date the document. It is encouraged that all parties involved in the transaction should sign and date the business purchase agreement.
Since a business purchase agreement is admissible in court and can be used to prove the transfer of ownership, it must be witnessed, signed, and dated. The document should be signed by at least two witnesses, one representing each party in the transaction. The names of the witnesses, their signatures, and the date of signing must also be included in the document.
Step 7: Notarization or Certification
The last thing to do in writing a business purchase agreement is to have it notarized by a notary public. This ensures that the document meets legal requirements and makes the purchase agreement admissible in court. It also ensures that all parties acknowledge signing the business purchase agreement willingly without being forced into doing so before the notary public. It also shows that they acknowledge the contents of the purchase agreement.
NOTE: It is important also to note that laws vary from state to state, and one should ensure that the purchase agreement conforms to their state laws.
Business Purchase Agreement Templates
Following are some free download templates for your convenience:
Conclusion
This article has given a general idea of what is included in drafting a well-formulated business purchase agreement. Every component must be clearly and thoroughly explained to avoid misinterpretation or other issues by the parties involved in the transaction when drafting the document. The parties involved in the transaction must also sign and date the document after full disclosure of its contents.
