In sales and business, a number of documents can be negotiated on and delivered by the parties involved, key among them being the purchase agreement. This is the premier document that gets to the point of the deal and is what parties will spend most of the time negotiating on. As a business owner, this is the bread and butter of your job, and understanding the purchase agreement completely is a necessity. Here are some helpful pointers on what to look out for when studying them.
Why is it so important?
Let’s say you want to purchase goods, services, or even an entire business. How will the transaction go from there so that you can’t get ripped off? You need an unambiguous, explicit written document that goes into the exact details of the purchase or sale. Incorporate the terms contractually. The document enables both you and the seller or purchaser to legally settle on the terms of the deal being made, which are referenced within.
The agreement can also contain some auxiliary important clauses. Like a covenant to not compete with the sold business. Another important part is a non-disclosure clause that prevents any sensitive information that could harm the company from being spread by the person selling it.
What type of purchase agreement is it?
Depending on what is being purchased, the name of the purchasing agreement can vary. If the product being purchased is stock, it will typically be called a “stock purchase agreement”. If, on the other hand, the purchase is more akin to a company merger, it will be called a “merger agreement”. With asset sales, they are referred to as “asset purchase agreements”. And so on.
There are some legal and technical differences between these different transaction structures, but all of them share similar provisions so they can all be referred to as a purchase agreement. A purchase agreement can also include a clause of commitment for the buyer to purchase a percentage of the product from the designated supplier.
Read it yourself
As a business owner, you’ll see many purchase agreements over the years. Reading all of them is tiring, so you might consider delegating some of them to your financial advisers. This is why you hired them, after all. It will lessen the workload and free up more leisure time, but is it worth it?
While it may seem like a gargantuan task to read all the different purchase agreements, at least understanding them is necessary not just out of habit, but to prevent legal troubles. If you are taken to court and a lawyer asks you if you read the agreement before you signed it, saying no would not absolve you of any errors and would make you look like a fool.
Understand what it covers and what’s included
When buying a business from a seller, the purchaser must take into account assumed liabilities. Buying the business means you take on the responsibility of any of the company’s outstanding loans, records payable balances, and funds that are owed to a current vendor. The assumed liabilities clause is stated in all agreements, so keep it in mind.
With simple enough sales with few and uncomplicated assets, you can download a fill-in-the-blanks form from an online site. More complex business purchase agreements will be multi-page behemoths that will need to be reviewed and amended several times. You should consult your broker and call on the expertise of your attorney to deal with those.
Know the parties involved
In its simplest form, a purchase agreement involves two parties: the company selling and the company or individual purchasing. However, you will find that many agreements can involve additional parties of interest.
If, for example, there are multiple different shareholders that own stakes in the company being sold, each and every one of those same shareholders have to enter into the sale and purchase agreement. Cooperation and coordination between these parties are vital for the sale to be final.
What happens at closing
The purchaser is obligated to pay the seller the agreed upon amount stated in the agreement. The seller then gives the buyer a bill of sale, which states the financial terms of the agreement followed by the signature of the seller. This document gives ownership to the buyer.
The person or company selling must make some representations to the buyer. The seller proves that there are no pending legal suits against the business at the moment of sale, and the business is not enrolled in a pension plan that can benefit the seller at a later point in time. The seller agrees that ownership of the business is in his possession at the moment of sale.
Purchase agreements are nothing to sneeze at, they represent the backbone of every large sale. With the many different features, you might have a hard time getting them at first. Understanding purchase agreements is vital for anyone that works in business or is heading in that direction any time soon.