Buying a business is a major financial decision that requires careful examination of all legal documents involved in the sale. The purchase contract is an important element to consider because it defines many of the key aspects of the deal.
When reviewing a business purchase contract, pay close attention to key sections that can impact the success of the acquisition.
Asset purchase vs stock purchase
One of the first things to determine is whether you are buying the assets of the business or the stock shares. An asset purchase involves only acquiring specific assets, while a stock purchase means acquiring the entire company. The latter exposes you to any liabilities associated with the business.
Representations and warranties
This section covers statements by the seller regarding the condition and operations of the business. Make sure any representations align with your own findings from due diligence. Pay particular attention to warranties concerning finances, compliance, pending litigation and intellectual property ownership.
Indemnification
Look for adequate indemnification clauses that protect you if representations made by the seller turn out to be false. Negotiate caps on indemnification amounts and time periods for any claims.
Non-compete agreements
If the seller will remain involved with the company post-sale, include non-compete clauses and confidentially agreements to protect your business interests. Specify reasonable time frames and geographic limitations.
Carefully examining key provisions in a business sale contract can prevent unpleasant surprises down the road. Protect yourself by negotiating terms favorable to your interests. With careful planning, you can make your business purchase a success.
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