Everything You Need to Know About Business Purchase Agreements

When it comes to writing purchase agreements, there’s a LOT. The hope for this article is to break it down to the big picture stuff, so that we know what’s important at the LOI (Letter of Intent) stage of the game!

What is a Business Purchase Agreement?

Purchase Agreement is short for various types of business sale contracts. The term includes: Asset Purchase Agreements (APAs), Stock Purchase Agreements (SPAs), Mergers, Acquisitions (M&A), F-Reorganizations, Partner Buyouts, and Partner Buy-ins. 

Each different type of Purchase Agreement has its own benefits and drawbacks with regard to tax treatment, risk, price points, and so on.

The Importance of a Business Purchase Agreement

Getting a Purchase Agreement written by a lawyer who specializes in M&A work is crucial for both sides of the deal, but for different reasons. The Seller needs a good contract that guarantees that the Seller will get paid, even if the Buyer messes up the business after the sale and loses out on revenue to pay the Seller. We’ll get into more detail about this below. 

The Buyer needs a good attorney so that the business they’re buying actually works in the way the Buyer expects it to. It’s not so simple as “kicking the tires” when buying a used car–a living, breathing business (especially smaller ones) can have crazy things going on “under the hood,” and it often takes an experienced legal professional to find those problems. 

For example, a friend of mine purchased a business (did not hire an attorney) and had their accountant review the Seller’s books. The books said that payroll for the employees was low for the industry, which made the Buyer more attracted to the business. After the business was purchased, however, the Buyer was told by the employees that all of them were being paid “under the table” a great deal more than the Seller disclosed in his books. That explained the “low payroll number,” and the resulting higher (looking) profitability. Of course, it was all fake, but the Buyer didn’t know this when they negotiated the price for the business. Typically, businesses sell for a multiple of the profits per year the business makes on average. If you artificially inflate the business’s profitability by underreporting payroll expenses, then this multiple blows up! The Buyer, sadly, ended up paying $300,000 more for a business that was worth far less, and now he had to figure out how to pay the employees’ payroll that was commensurate with what their prior boss was paying them! 

Contingencies like this are why Buyers hire lawyers to write their Purchase Agreements–there’s special contractual language that can both prevent this sort of fraud and give Buyers an easy lawsuit to recoup their losses if they find out about it after the business’s sale. 

That story is not an exhaustive list of why Buyers need to hire professionals to write their agreements, but I think it’s illustrative enough. 

Who Should Draft a Business Purchase Agreement?

Lawyers. I know, I know, we’re biased, but lawyers actually make a lot MORE money from clients when they make the mistake of NOT hiring lawyers in the first place! That story about the under-the-table payroll, above, that Buyer mistakenly did not hire an attorney in the first place, but he definitely had to hire attorneys afterwards, and the legal work to get him out of a badly written purchase agreement cost him over $45,000. The Purchase Agreement would have cost around over 90% less. So, it’s actually better for lawyers if people try and do it themselves and mess up. 

Seriously, though, hire an attorney. We love business owners, and we want you to be successful and not have to shell out your savings to make up for something easily fixed on the front-end.

What Should Be Included in a Business Purchase Agreement?

This article would take 20 pages if we were to really get into everything that should be included in a business purchase agreement, but some bullet points should give you an idea:

• The Purchase Agreement Terms themselves, including:
  • Purchase Price, Timing, and Logistics to pay it (is it based on the business’s revenue post-sale? Will the Seller “finance” some of it? Is it going through a lawyer’s escrow account? Is there a business broker that gets paid some? Does the Seller’s business owe any money to banks that need to get paid some or all of the purchase price?)
  • The Due Diligence Period
  • The Downpayment (if any)
  • Non-Compete and Non-Solicitation Agreements, if applicable, for the Seller. 
• Promissory Note –  if the Seller is financing any of the purchase price
• Bill of Sale – for any hard assets being sold, such as equipment and vehicles
• Assignment and Assumption Contract – to transfer over all relevant contracts to the Buyer, such as vendor and employment agreements
• Allocation of Purchase Price among assets being purchased (this can have massive tax consequences to the Parties and is usually edited with a CPA)
• Employment Agreement for any Sellers who are staying on to help with the transition
• Employment Agreements for key employees to sign with the new business that is buying the old one. 
• Provisions to protect against fraud (see the above example regarding payroll)
• Clauses that indemnify the Buyer from liabilities that are the Seller’s fault, that arose before the sale of the business, and vice-versa for the Seller’s protection if the Buyer messes up after the sale. 
• The Buyer will need new Corporate Documents depending on the type of company that is buying the old one (LLC, Corporation, etc).

Due Diligence Requirements During the Business Purchase Agreement Process

The amount of Due Diligence a Buyer will go through when purchasing a business is normally in proportion to the size and value of the business they’re looking to buy. However, the smaller businesses can more easily hide things because of this. That said, a lot of that can be covered in the purchase agreement itself, as long as it’s well written. 

Here are some due diligence items worth going over:

• Do the books check out? Normally, a purchase price is based on a company’s financials (think EBITDA / profitability). If the numbers used are skewed, though, the resulting purchase price will also be wrong. Sometimes, it’s worth hiring a professional appraiser to get a valuation on a company before buying it. Most SBA loans require such a professional appraisal–because it’s smart!
• Are the employees happy? I’ve seen a lot of businesses lose their best staff after a business sale happens. Obviously, a lot of the value of a business is invested in the great employees who run it, so this is worth checking out. 
• Can the business function without the Seller? This is especially important for smaller, service businesses where the Seller can be the main producer or salesperson that keeps the company running. The best case for a buyer is a company that has employees who can easily run it without the Seller
• Does the business have any debt? Most businesses have some debt, but not all debt is created equal. Many companies took “EIDL” loans around 2022 and 2023, when the government was giving low-interest loans to small businesses to keep them afloat during COVID. That money still needs to be paid back, though. Companies also often have equipment loans. If the company has any debt, that debt must be paid off before the Seller gets any of the purchase money. Otherwise, the Seller can leave the Buyer “holding the bag,” having to both pay the purchase price AND pay off all the debt that the business owes!
• Are there lawsuits pending against the business itself, or the Sellers themselves? Lawsuits are unpredictable, and they typically take over a year to resolve since the courts are so jammed up. There are ways of investigating whether a company has any pending lawsuits. 
• Are there any upcoming changes in the industry that the Buyer doesn’t know about? Maybe Congress plans to pass a new rule that would make the business shut down! 

Work With a Trusted Georgia Business Attorney

As you can see, there’s a lot that goes into writing Purchase Agreements, and we’ve only skimmed the surface. If you’re looking to buy or sell a company, please, please, please hire a Georgia Business Attorney to help you get a great agreement that protects you and all of your investments.