The Purchase Agreement Used to Acquire a Business: Part I

Whether it’s a small company purchase put together by a business broker or a large firm acquired with the help of a team of attorneys, a purchase agreement is used to transfer ownership. Here are the basic components of these agreements.

1. Introduction
2. Price and structure of the acquisition / purchase
3. Representations and warranties of the buyer and seller
4. Covenants of the buyer and seller
5. Conditions to closing
6. Indemnification
7. Termination clauses and remedies
8. Miscellaneous

Let’s start with the first two in this blog post:

1. Most legal contracts, including most business purchase agreements, start with an introduction to layout some definitions, or “recitals”, and to describe the intentions of the parties.

2. The next section lays out the most significant details of the business transfer. It not only defines the purchase price, but also the structure of the acquisition. For example, it defines whether the transaction is a stock sale, asset sale or merger, and also describes many of the mechanics of the deal that will enable that structure.

This section will detail the cash payment, escrow requirements, timing of payments, and any earnout provisions. If it is an asset sale, this section contains a description of the assets purchased (referencing exhibits or schedules) and liabilities assumed. If there is to be an adjustment of price depending on the final closing of the books (adjustments for inventory, bad debt, working capital, work in process, etc.) then this is also described in this section.

The price section can be refreshingly short in the case of an all cash deal, to quite lengthy in the case where there are notes, contingent notes, working capital adjustments, earnouts, etc. This is the section where you find out that the deal you sketched out on a napkin actually took two pages (and a lot of money) for the attorney to describe legally. It is always best to attempt to keep everything as simple as possible, because even the deals that start out fairly simple tend to grow in complexity.