When a business chooses to sell itself to a strategic partner, the parties will structure their deal in a purchase and sale agreement. These agreements govern the deal price, payment terms, the process for closing the sale, representations/warranties, and the parties’ post-closing rights and obligations.
Understanding Purchase and Sale Agreements
A purchase and sale agreement can govern the sale of a business from its owner(s) to a new owner or party. An owner may sell their business either by selling all its stock or equity, giving the buyer ownership and control of the business entity, or by selling all the business’s assets, leaving the company as an empty legal shell.
Key Elements of a Purchase and Sale Agreement
The essential provisions of a purchase and sale agreement for a business include:
- Description of the Sale – The agreement should identify what the seller will sell, such as the business’s stock or equity, or all/substantially all of the business’s assets.
- Purchase Price and Payment Terms – An agreement should state the consideration for the deal, such as cash or equity in the buying company, and the terms under which the buyer must pay the purchase price (e.g., lump sum, periodic payments, earnouts).
- Closing Conditions – A purchase and sale agreement may make closing contingent on various conditions or obligations the parties must meet, such as the buyer obtaining required financing, shareholder approval of the transaction, or regulatory sign-offs on the sale.
- Representations and Warranties – A seller will make various representations and warranties about their business, such as the accuracy of financial statements, the company’s compliance with legal/regulatory requirements, or the lack of material risks or liabilities for the company.
- Liability Allocation and Indemnification – Purchase and sale agreements can allocate post-signing/pre-closing or post-closing liability for the sold business between the parties, giving the parties the right to seek indemnification from one another for any liability allocated to the other party.
- Restrictive Covenants – A purchase and sale agreement may include a confidentiality provision barring the parties from disclosing the deal’s details. An agreement may include non-compete or non-solicitation clauses that bar the seller from immediately launching a new competing company.
Common Challenges of Purchase and Sale Agreements
Some of the top challenges of purchase and sale agreements in business transactions include:
- Ambiguous or Inadequate Contractual Terms – Ambiguous agreement language or the agreement’s failure to address critical issues can lead to later legal disputes between the parties.
- Inadequate Due Diligence – Business transactions can eventually go awry when buyers fail to conduct adequate due diligence, which might uncover potential red flags with a deal.
- Allocation of Liability – Parties may get into disputes over allocating a sold business’s liabilities, as parties can disagree when the business’s liabilities become the buyer’s concern or responsibility.
- Tax Implications – Failing to consider the tax implications of a sale when structuring a purchase and sale agreement may lead to unforeseen costs for buyers and sellers.
How a Legal Advisor Can Help
Parties negotiating a business transaction can benefit from having experienced legal counsel guide them through each stage of the deal. Attorneys can help with due diligence by knowing what documents and information to request and reviewing the provided diligence to identify potential issues. Attorneys can also negotiate deal terms for their clients, helping make sure that a transaction sells the business for a fair price and that the parties’ agreement protects their rights and interests.
Contact a Business Law Attorney Today
Whether buying or selling a business, an experienced business law attorney can help you negotiate a purchase and sale agreement that protects your interests. Contact Hubbs Law today for a confidential consultation to learn more about purchase and sale agreements in business transactions.