If you have decided to purchase an existing business, you need to understand what goes into creating a good small business purchase agreement to protect your interests.
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updated September 7, 2023 · 4min read
You've evaluated the pros and cons of starting a new business from scratch versus acquiring an existing enterprise, either by buying a franchise or purchasing an independent existing business.
Now that you've decided to purchase an existing business, and know which company you want to buy, you need to formally solidify the transaction with a business purchase agreement.
Any purchase of an existing business should be done with a written business purchase agreement. This is a legal document that sets forth the terms of the transfer.
Although it's called a business purchase, it may be more appropriate to call it a business asset and liability purchase. It is not possible to effect a transfer by simply stating, for example, "Joe's Auto Repair is hereby transferred to Bill." What is really being transferred are various types of assets and liabilities. One of those assets is the name "Joe's Auto Repair," and the reputation and goodwill that is attached to that name.
Therefore, the business purchase agreement needs to specifically list what assets and liabilities are being transferred. This is true regardless of whether the business is structured as a sole proprietorship, some form of partnership, a limited liability company (LLC), or a corporation.
A well-drafted business purchase agreement will set forth all of the terms of the sale, including:
If appropriate to the transaction, the business purchase agreement also may include provisions:
If the business being purchased is a corporation, it also may be necessary to have a small business stock purchase agreement. A transfer of the assets of a corporation may have different tax consequences from a transfer of stock, so it is important to seek out competent tax advice as part of your purchase process.
The purchase price should consider various factors, such as the value of the assets and debts being transferred. A less concrete consideration will be each party's evaluation of the income potential of the business.
The agreement may state a single purchase price, or it may allocate the total price among several categories, such as merchandise or inventory, accounts receivable, equipment, goodwill, etc. Allocation is typically done for tax purposes, or to allow for an agreed-upon recalculation on the date of closing.
There are certain warranties, representations, and contingencies that are common to the sale of a business. These generally represent factors that may allow the purchaser to get out of the purchase agreement.
Although the specifics will vary with the business being transferred, the following are fairly common warranties and representations that are made by the seller:
Common contingencies include:
Buying a business is not a simple matter. Competent legal advice and tax advice are essential to creating a good small business purchase agreement—one that will protect your considerable investment and help contribute to your future success.
by Edward A. Haman, Esq.
Edward A. Haman is a freelance writer, who is the author of numerous self-help legal books. He has practiced law in H...
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