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Purchase Agreement

Tags: buying a business, deal structures, escrow bulk sales, seller notes, selling a business

Comments & Replies: 3     Views:     Post ID:     Comments About This Glossary Term

The purchase agreement or buy-sell agreement is also known as the "asset purchase agreement" (APA), the "contract of sale," the "purchase offer & acceptance agreement," and various other terms. This is the document presented by the buyer to the seller as an offer that the seller then accepts, rejects, or answers with a counter-offer. When both parties have signed, the contract is created, and the due diligence and escrow processes begin. Typically, the APA is drafted by the seller's or buyer's broker on a standardized form that covers all the essential elements of the deal being offered - subject matter, identification of the business and its assets, the purpose/objective of the contract, the identities of the parties, price, terms, and (usually) several contingencies, as well as other important and customary provisions.

Among the contingencies is almost always a due diligence period and all the contingencies that "due diligence" entails, and, often, also contingencies concerning the posting of a good faith deposit, the transfer of the lease, the obtaining of financing, and, sometimes, the transfer of a franchise. When it is presented by the purchaser, the seller then can accept it as is, can reject it completely, or can make a counter-offer, changing specific terms and conditions.

When there finally is an offer and a matching acceptance, there is a "meeting of the minds" - another essential element verified by the signatures of both parties, and a contract then comes into existence. Essentially, once the APA is signed by both parties, the seller typically has an absolute obligation to sell, but the buyer has only a contingent obligation to buy - all the contingencies or conditions must be met before the buyer's obligation becomes "absolute." The APA becomes the "blueprint" by which the entire transaction is directed, and which the parties, their representatives, and the escrow agent must honor.

The APA is a legally-binding document that could be the most important document signed in the history of the business - for the buyer and the seller. The parties should take this step very seriously and with professional representation - whether that is from a licensed business broker, or an attorney, or both.

Contributor: Business Broker, Northern California
The Purchase Agreement is the formal and final agreement that brings all the conversations, emails, seller representations, buyer representations, third party lenders and more into the final document that represents the agreement between the buyer and the seller.

A Purchase Agreement may be for an Asset sale or a Stock sale. The differences are significant both in legal and tax consequences.

It's not unusual for a Purchase Agreement to be preceded by a Letter Of Intent or for a larger transaction, an Indication of Interest.

The contract between the buyer and seller of a business, after they've negotiated price and other aspects of a transaction, is called the purchase agreement. It also is known as the "buy/sell agreement." Once signed by both parties, this document legally binds them to the requirement of removing contingencies before the deal can be completed. Exact terms of the deal also should be part of their agreement. This will help prevent a disagreement about specifics, such as allocation of purchase price or duration of a covenant not to compete, as they proceed toward closing the transaction.

A signed purchase agreement can define the transfer involving a large business selling for tens of millions of dollars, a mid-sized business in the $2 to $10 million range, or a small business sold for under $2 million and perhaps as low as a few thousand dollars. And the written agreement can be used to transfer either business assets or corporate stock.

Among the usual contingencies are the seller's requirement that he or she is provided and satisfied with the buyer's verified financial information. Sellers want assurance their buyer has the cash needed for down payment and working capital requirements. The buyer's credit worthiness also is important to sellers who plan to help finance the transaction by taking a buyer's promissory note for part of the purchase price.

Meanwhile, buyer contingencies include being satisfied with the physical and financial condition of the business after conducting due diligence to make sure the business performs as was represented, and to verify there are no serious problems that were not apparent during the buyer's introduction to the business. Another frequent buyer contingency is being granted a business purchase loan at acceptable terms if needed to complete the deal. And buyers of a business located on leased premises often want to make sure the lease will be transferred or rewritten to provide a long-term commitment at an acceptable rental rate.

Contingencies might also involve the buyer being able to obtain government issued licenses or permits needed to conduct business. This is important in the sale of restaurants, bars and retail grocery operations that serve or sell alcoholic beverages, requiring the owner to have a liquor license, usually issued by an agency of the state. Once the contingencies are satisfied, parties open escrow to complete the transaction as specified in the purchase agreement.

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