How to draft a business purchase agreement - top 5 clauses to include
What is a business purchase agreement?
A business purchase agreement is an agreement under which one party (the buyer) agrees to buy certain assets of a business from another party (the seller). The business purchase agreement will set out the terms on which the business/assets are being purchased - it is for use in business/asset sales only and not share sales. Find out more about the differences between asset sales and share sales here.
This type of transaction is sometimes known as the sale of a business as a going concern - for more information about those sales, read these FAQs.
Key clauses to include in a business purchase agreement
Details of business and assets - with an asset sale, sometimes only certain of the business’ assets are being bought by the buyer, with other assets and liabilities remaining with the seller. Because of this, it is really important to clearly set out exactly what assets are being transferred to the buyer. Types of assets that may be transferred include:
Social media accounts;
Intellectual property rights;
Vehicles and machinery;
Book debts; and
Failure to define the assets being transferred clearly in a business purchase agreement could lead to a dispute between the buyer and the seller in the future over what each party anticipated to be included in the sale.
Purchase price - a business purchase agreement should set out the price being paid by the buyer for the business and assets, as well as when that payment will be due. For example, it could be payable in one lump sum on completion of the transaction, or alternatively be payable in instalments. A clear payment mechanism should be included in the business purchase agreement so there can be no dispute over the total payment amount, as well as when those payments are due.
Completion mechanics - this is an important clause to include in a business purchase agreement, as it sets out when the transfer of the business and assets to the buyer will become effective (known as "completion"). Such a clause will also list the actions that must be taken by the seller at completion e.g. delivering assignments, records and other documents relating to the documents being transferred to the buyer.
Warranties - a warranty is a contractual statement of fact and, in the case of business purchase agreements, often takes the form of assurances from the seller as to the condition of the business or assets being purchased. If the warranties are untrue, a claim can be brought by the buyer for damages. Warranties therefore provide buyers with a post-sale remedy if any of the warranties (which have not effectively been disclosed against) are incorrect and the value of the assets are reduced as a result. In reality, this can provide a mechanism for retrospective price adjustment operating as a claim for damages resulting from a breach of contract.
Typical warranties given in a business purchase agreement include:
General - e.g. that the seller has the right to enter into this agreement and to sell the business;
Financial - e.g. that the seller’s accounts are accurate and there have been no material adverse changes to the seller's financial position since the last account date;
Assets - e.g. that the seller legally owns each of the transferred assets;
Contracts - e.g. that the contracts being transferred are valid and no grounds exist which could cause the contracts to be terminated;
Legal compliance - e.g. that the business has been conducted in accordance with applicable laws;
Equipment - e.g. that equipment being transferred is not subject to any interest or equity of any person or any mortgage, charge, title retention or any other security agreement or arrangement;
Employees e.g. that employment law has been fully complied with in respect of employees being transferred.
Confidentiality - corporate transactions often include sharing confidential information about a business’s internal operations, that you would not want to be made public. It’s therefore really important to include a confidentiality clause in a business purchase agreement that requires both parties to keep all information shared under or in connection with the business purchase agreement a secret.
What other clauses might be relevant for my business purchase agreement?
Employees - if employees are being transferred as part of the business purchase, clauses relating to those employee transfers should be included in the business purchase agreement. As the transfer will trigger TUPE, additional representations and warranties from the seller will usually be included in the business purchase agreement, including that:
the seller has complied with its obligations under TUPE;
the seller has paid all sums due to employees up to the time of completion of the transfer; and
there are no sums owing to or from any employee other than reimbursement of expenses for the current expenses period and wages for the relevant salary period.
Restrictions on the seller - It is common for a buyer of a business to want the seller to agree to certain restrictions so that they cannot set up a competing business against the buyer following completion. For example, this could include restricting the seller from:
employing or soliciting anyone employed by the buyer;
dealing with or seeking custom from the business' customers; or
dealing with or seeking custom from the business' suppliers.
Book debts - if book debts are included in the assets being transferred, additional clauses should be included in the business purchase agreement that deals with the transfer of those debts. Book debts include sums owed to a business for goods or services supplied or work carried out, and loans made by the business may also be treated as book debts.
Stock valuation - if existing stock is being transferred, provisions should be included in the business purchase agreement that includes a procedure for valuing that stock, as well as dealing with any disputes between the buyer and the seller over the stock valuation.
Other drafting tips for your business purchase agreement
For more information, read our comprehensive guide to business purchase agreements.
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