Understanding the Purchase and Sale Agreement

The end is in sight. As you reach the final stage of the sale of your business you need to make final decisions regarding sale structure, selling price, asset allocation, and payment structure. These final negotiations also include the Purchase and Sale Agreement, which becomes the cornerstone that encapsulates the intricacies of the deal. At this point in the sale process:

• A buyer has chosen to acquire your business.
• The buyer’s in-depth investigation has confirmed the purchase decision, and your own due diligence has confirmed that the buyer has the financial and business capability to complete the purchase.
• You are both ready to reach consensus regarding price, payment structure, price allocation (and the resulting tax implications), and all the other details that comprise the final deal to be detailed in the purchase and sale agreement to be signed on closing day.

Negotiating Final Agreements

Final negotiations result in the final terms of your business sale. Keep negotiations moving quickly. Pauses will be necessary to obtain input from your sale advisors, but whenever possible limit them to a single day. Delays dampen interest or heighten concern – neither of which supports the kind of healthy negotiations that lead to a successful closing day. Be prepared to negotiate the following issues:

• The purchase price, which in many cases may be between 10 and 15 percent lower than the asking price. Sellers requiring all-cash payoffs at closing usually settle on prices toward the lower end.
• How the price will be paid, including how much will be required as the closing-day payment and how much will be paid through deferred payments.
• How the price will be allocated between the seven IRS asset classes.
• How issues discovered during due diligence will be addressed, either through price concessions or actions that rectify conditions of concern.
• How the transition period will be handled, including how and when the sale announcement will be made; whether employees will be rehired; how and when to contact and notify employees, customers, clients, suppliers, vendors, and distributors; how work in progress will be completed; and how unknown liabilities that become apparent after closing will be addressed.
• The seller’s post-sale involvement with the business, leading to agreement on the seller’s post-sale transition period involvement, timeframe, and compensation, if any; post-sale involvement through a personal services contract, if any; and willingness to sign a covenant not to compete.
• Agreement on how contingencies detailed in the letter of agreement to purchase will be addressed or removed. These include such issues as transfer of leases and contracts and other legal and financial concerns. Also, agreement must be reached on how to address issues that arose during due diligence, whether through price concessions or through actions that rectify the condition.

The Purchase and Sale Agreement

Once final negotiations have been agreed to, the purchase and sale agreement will be drafted. The following list describes the contents of the closing agreement you and the buyer will sign. Behind many of the items lie details that require advice from trained legal experts, which is why your broker and attorney are key partners at this stage.

• For the simplest sales – those involving few and uncomplicated assets and a very low selling price – a fill-in-the-blanks “purchase and sale of business agreement” easily found online, will suffice. Before using such forms, however, call on the expertise of your attorney. The agreement you sign needs to comply with the letter of the law in your region, and requirements vary from state to state.
• For all other sales, expect the sale agreement to span many pages and to be accompanied by exhibits and attachments that address all the necessary points to be covered. Your broker, if you are using one, will guide you through the process. Otherwise, either your attorney or the buyer’s attorney will write the first draft, with the other one reviewing and suggesting amendments – unless you and the buyer agree to both work with and split the legal fees of a single attorney.

Contents of the purchase and sale agreement include:

• Names of the seller, buyer, and business, including the location of each.
• Assets and liabilities included in and excluded from the sale.
• Closing date.
• Price and how it is allocated across IRS-determined asset classes, along with descriptions of how the price will be adjusted to reflect closing-day valuations.
• Seller agreements of non-competition, management consulting, or post-sale employment.
• Payment terms.
• Security agreements if a portion of the sale will be paid through deferred payments.
• Inventory included in the sale.
• A list of accounts receivable included (or excluded) from the sale and how payments of uncollected receivables will be handled.
• Buyer’s and seller’s representations and warranties.
• Seller’s covenants to transfer the business and its name.
• Employee termination clause confirming how the seller will terminate and pay employees through the termination date and when they may be hired through the buyer’s new business.
• The buyer’s post-closing rights and obligations.
• Default provisions.
• Business transfer agreements.
• Statements regarding participation or absence of brokers and how buyer and seller will pay professional fees involved with the sale closing.

In the final leg of your business sale journey, the purchase and sale agreement emerges as the compass guiding the transition of ownership. Its intricacies demand meticulous attention, and your trusted partners—your broker and attorney—play an important role. Whether it's navigating legal complexities or ensuring a fair representation of your interests, their expertise is invaluable.

As you dive into the details of the purchase and sale agreement, remember that this document is not just a formality; it's the contractual expression of the entire sale process. Collaborate closely with your legal team and approach the closing day with the confidence that your business is transitioning into capable hands. Visit the BizQuest Broker Directory to find a business broker to help you close the deal.