The Business Purchase Agreement
Buying a business is completely different than buying your home. A business purchase agreement is a much more complicated document and, to protect yourself, experienced legal advice is an absolute necessity.
Many buyers make the mistake of using standard form real estate documents. These agreements are not designed to deal with all the issues involved in a business sale. Using standard agreements like this can cause a lot of grief, confusion and uncertainty on both sides.
A business purchase agreement (or a Buy Sell Agreement) is a much more complex legal document than a house purchase agreement.
Some of the more important issues that are addressed are:
Is this an Asset Sale or a Share Sale?
In an asset sale, the buyer is buying specific assets and assuming specific liabilities from the company, not from you personally. All proceeds go to the company and can only be paid to you as salary or dividends from the company. The company is still owned by the existing shareholders and the buyer usually incorporates a new company.
In a share sale, the buyer is buying the shares from the shareholders of the company. Proceeds go the shareholders themselves and the company is now owned by the buyer or buyers.
In most cases, selling shares will minimize the tax bite on the seller. But buyers generally prefer not to buy shares for both tax and legal liability issues. Because of the tax treatment, an asset sale and share sale can end up having different prices.
The type of sale is generally determined through negotiations.
Which Assets and Liabilities are Included and Excluded in a Business Purchase Agreement?
Regardless of the type of sale, the business purchase agreement must specify which assets are included and excluded. It must also specify if any liabilities will be assumed by the buyer.
A failure to document these items will likely cause misunderstandings and disagreements between the buyer and the seller.
How Will the Purchase Price Be Allocated?
When you buy a house, it’s simple. You’re buying one piece of real estate for a specific amount. In a sale of a business (asset sale), the business purchase agreement must specify to which assets and liabilities the purchase price is allocated.
The price could be allocated to one or more of the following items:
- Working capital: accounts receivable, accounts payable, inventory and other current assets and liabilities
- Capital assets: furniture, fixtures, real estate, equipment, etc.
- Goodwill and other intangible assets such as intellectual property
- Leasehold improvements
- Non-competition provisions
- Assumption of long-term liabilities
- Consulting agreements
- The allocation of the price may also be a subject for negotiations.
How Will the Purchase Price Be Paid?
In a perfect world, at least for the seller, the price will be paid in cash and the deal is done. In the real world, this is seldom the case.
The purchase price can be a combination of several components:
- Bank financing
- Seller financing. Many buyers will expect the seller to finance part of the price.
- Earn-out. Part of the price is to be paid in the future depending on some criteria measuring performance.
- Consulting agreement with the seller. The seller may provide consulting services to the buyer or even remain with the business for a period of time.
Buyers and sellers can make the sale conditional upon a number of different factors. Some of the more common buyer conditions are financing and due diligence.
Due diligence refers to the process of investigating the books and records of the business and carrying out any other investigations to prove the seller’s claims to the buyers. Due diligence also includes legal due diligence procedures that should be conducted by a lawyer.
The conditions forming part of the business purchase agreement should be drafted with proper legal advice.
The buyer will generally insist the seller does not compete with this business after the sale. Points to be negotiated are:
- How long will the non-competition provisions last?
- What geographic area is covered?
- Courts will insist on reasonableness so care must be taken not to be too aggressive in these demands.
Representations and Warranties of the Seller and Buyer
The business purchase agreement will also contain many clauses covering conduct of the business prior to sale as well as the rights, obligations, indemnifications and responsibilities of both the buyer and seller after the sale.
A well-crafted business purchase agreement will ensure your best interests are looked after, whether you’re the buyer or the seller.
Don’t Take a Chance: Do it Right
If you’re entering into a business purchase agreement in Calgary, give us a call today.