The purchase agreement for your business is one of the most important legal documents you'll ever sign. After all, many years of hard work will culminate in this single transaction, by which you'll put a dollar sign on the value of your entire operation. You don't want to have problems collecting the money due you or to have legal problems haunting you into the future, and a carefully constructed purchase agreement can be your best insurance policy for preventing such catastrophes.
Customarily, the buyer's lawyer provides the initial draft of the purchase agreement for a business. This makes sense, since the buyer has to live and work with the company while you will walk away into the sunset with the cash (theoretically, at least). However, we suggest that your lawyer should draft the sections that are most important to you. In most cases, that means the clauses containing representations and warranties about the business. Ideally, you should try to avoid or limit the making of any warranties or guarantees for which you can be held legally accountable. You may also negotiate closely with the buyer as to which liabilities he or she is assuming, and which will remain with you. Here's where a top-notch lawyer can really save your skin. Make sure that you maintain ongoing liability insurance for any liabilities that will remain with you for example, product liability insurance on products that were sold during your tenure as owner.
Indemnity provisions, in which you promise that you will reimburse the buyer for certain types of expenses if they occur, are often a hotly disputed area of the contract. If you agree to any indemnifications, make sure there's a time limit such as two years on the buyer's claims, and a dollar limit such as 20 to 25 percent of the business purchase price. Depending on the value of your business, you should also insist on a dollar-limit floor for claims, so that the buyer doesn't nickel and dime you to death with lots of small problems.
If you are selling the assets of your business, as opposed to the stock, you'll need to allocate the purchase price among the assets for tax reasons. The allocation should be part of the purchase agreement so there's no dispute about it later. The allocation will also have to be reported to the IRS on
Form 8594 , Asset Acquisition Statement.
The purchase agreement is likely to be a lengthy, complicated document. For some of the more elaborate deals, the contract plus attachments can run into the hundreds of pages. You should go through it carefully with your attorney and make sure that you understand the implications of whatever is in there.
Once both parties have agreed on the language of the purchase agreement, it will be signed by both parties. The contract will state the date at which the final transfer of ownership and possession of the business will occur, and when the seller will get the money. With a signed purchase agreement in hand, the buyer can finalize any financing arrangements with outside lenders in anticipation of the closing.