Buying a business involves careful research and consideration by the prospective buyer. While everything might seem perfect about a company, an in-depth analysis may reveal a different story.
It's important to use contracts and agreements that are legally binding to protect and secure the interests of both buyers and sellers during the acquisition process. To ensure greater protection for all parties involved, ESL Advisors recommend taking extra care in drafting and negotiating each contract rather than relying on a final purchase agreement alone.
This article will list all the important agreements or contracts a buyer should sign when buying a business.
What Is A Business Purchase Agreement?
A Business Purchase Agreement is a contract between the seller and the potential buyer of a business. It incorporates all the terms of the sale, including what's included and excluded from the transaction and any additional provisions or guarantees.
The agreement is not just a "summary" of the deal. It's a legally binding document that protects both parties in case of any dispute or disagreement arising from the transaction. The agreement includes important details such as:
Purchase price and payment terms.
Description of assets to be bought and sold.
Assumption of liabilities, including debts, contracts, and leases.
Following the sale, the seller reserves all rights to their property
Any warranties provided by either party.
Noncompete and confidentiality agreements.
Provisions for dispute resolution.
It's important to note that all details in the purchase agreement should be carefully checked since any omission or mistake can potentially lead to misunderstandings or disputes in the future.
Agreements And Documents Required For A Business Purchase Agreement
Your legal team may add or exclude certain warranties we will list below. With that said, here are some contracts that are normally involved in a business acquisition:
Term Sheet
A buyer may submit a term sheet for the seller to review and accept. As the name suggests, the term sheet contains certain terms or conditions under which the buyer is willing to proceed with the acquisition. Some key sections of a term sheet include:
A letter of intent comes into play once the buyer and seller start negotiating the acquisition and need to record the agreed-upon terms of the deal. This letter contains an introduction of both parties and the basic terms of the agreement, which are usually not legally binding. However, the LOI can contain some legally binding sub-agreements, which we'll explain in the article's next section.
Non-Disclosure Agreement (NDA)
A non-disclosure agreement for selling a business is meant to protect the confidentiality of the target business and is a legally binding agreement contained within an LOI. So while it may not be directly beneficial to the buyer, it does create trust between both parties and paves the way for due diligence. Once an NDA is signed, the buyer is legally bound to protect the data the seller shares during the due diligence process.
Exclusivity Agreement
An exclusivity agreement is a legally binding agreement you may encounter within an LOI. It ensures the seller is not wasting their time with an uninterested buyer. The exclusivity agreement is useful for sellers since it ensures they aren't wasting their time with an uninterested buyer.
Purchase Agreement
Once all the arrangements mentioned above have been fulfilled, and both parties wish to finalize the deal, they can sign the purchase agreement. This agreement is usually definitive and is used in asset and equity purchases.
What Happens At Closing A Business Purchase Agreement
Since the final transaction will occur based on the purchase agreement, it replaces any previous agreements signed between the buyer and seller. Often the purchase agreement is based on the letter of intent. So converting it into the final purchase agreement takes less time and effort if you manage to create an effective letter of intent.
As mentioned earlier, the contracts we've listed above will not necessarily be a part of each acquisition deal. If parties agree to skip certain agreements, such as the letter of intent, they can simply use the final purchase agreement as the end all be all contracts. However, utilizing multiple contracts is still ideal for protecting your interests during each phase of the business purchase.
Get The Right Advice For A Successful Transition
ESL Advisers has an experienced team of certified exit planning advisors who will help you devise a successful business transition strategy while safeguarding your interests and limiting potential risks. Our specialists are adept at creating agreements that protect all parties involved in the process. Contact us today to discuss how our advisors can assist you through any purchase or sale.
