Lawyer for business mergers, acquisitions, divestitures and other transactions.

BUSINESS PURCHASE: AGREEMENT

 Business Purchase  -  Letter of Intent  -  Due Diligence  -  Negotiations  -  Asset vs Share  -  Purchase Agreement  -  Closing

Contact Neufeld Legal PC at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

When you are seeking to acquire an existing commercial business, the business purchase agreement is your primary tool for protecting your interests and ensuring that the transaction proceeds as you expect. The importance of a well-drafted business purchase agreement cannot be understated, with one of the more consequential aspects being the implications from the vendor's legal team seeking to remove or alter a legal protection that was originally sought in the business purchase agreement.

A. Parties to the Agreement

  • The principal parties to a business purchase agreement are the vendor and the purchaser; however, parties behind each of the vendor and the purchaser are oftentimes drawn in, with individuals involved with the vendor being subject to restrictive covenants, while individuals responsible for the purchaser would be called upon to guarantee promissory notes and other post-transaction obligations.

B. Description of the Assets/Stock Being Acquired

  • Asset Purchase: This is often preferred by buyers because it allows them to select the assets they want and exclude liabilities. The asset purchase agreement should have a detailed list of all assets included in the sale, such as:

    • Tangible assets (equipment, inventory, furniture, vehicles).

    • Intangible assets (goodwill, customer lists, intellectual property like trademarks, patents, and copyrights).

    • Leases, contracts, and other agreements.

  • Share Purchase: A share purchase transaction results in the complete acquistion of the entire corporation, including all its assets and liabilities. The share purchase agreement must clearly sets out the specific of the share acquisition.

C. Purchase Price and Payment Terms

  • Total Purchase Price: The amount you are paying for the business.

  • Payment Method: This can be a lump sum, a series of payments (promissory note), or a combination of cash and shares.

  • Holdback/Escrow: This is a critical provision for the buyer. A portion of the purchase price is held in a third-party escrow account for a specified period after closing. This money can be used to satisfy any post-closing claims against the seller (e.g., if the seller misrepresented the business's financials).

  • Earn-out: A portion of the purchase price is contingent on the future performance of the business. While this can align the seller's interests with the buyer's, it also creates risk and potential for disputes. You need a clear formula for calculating the earn-out.

  • Working Capital Adjustment: This clause ensures that the business has a certain level of working capital at closing. If it's lower, the purchase price is reduced; if it's higher, it may be increased.

D. Representations and Warranties

  • This is one of the most important sections for the buyer. It's where the seller makes a series of factual statements about the business. As the buyer, you want these to be as broad and detailed as possible. If a statement turns out to be false, you have a basis for a claim against the seller. Key representations and warranties a buyer should demand:

    • Financials: The financial statements are accurate and complete.

    • Liabilities: All known liabilities have been disclosed.

    • Contracts: All material contracts are valid and enforceable.

    • Compliance: The business is in compliance with all laws and regulations.

    • Litigation: There are no pending lawsuits or threats of litigation.

    • Intellectual Property: The business owns or has the right to use all its intellectual property, and it does not infringe on the rights of others.

    • Title to Assets: The seller has good and marketable title to all assets being sold.

E. Covenants

  • These are promises to do or not do something between the signing of the agreement and the closing.

    • Pre-Closing Covenants: The seller agrees to operate the business in the ordinary course, not to enter into new contracts, and not to sell assets without the buyer's consent. This protects the value of the business while the deal is pending.

    • Non-Competition and Non-Solicitation: Absolutely essential for the buyer. The seller agrees not to compete with the business for a specific period and within a defined geographic area. They also agree not to solicit employees or customers of the acquired business.

F. Conditions to Closing

  • These are conditions that must be met before the buyer is obligated to close the deal. If a condition is not met, the buyer can walk away without penalty.

    • Due Diligence: The buyer must be satisfied with the results of their due diligence investigation.

    • Financing: The buyer must secure the necessary financing.

    • Third-Party Consents: All necessary consents from landlords, lenders, and other parties must be obtained.

    • No Material Adverse Change: The business has not experienced a significant negative event since the agreement was signed.

G. Indemnification

  • This section outlines how the buyer can seek recourse if a representation or warranty made by the seller proves to be false.

    • Scope: What types of losses are covered?

    • Basket/Threshold: A minimum amount of losses that must be incurred before the buyer can make an indemnification claim. This prevents claims for small, insignificant issues.

    • Cap: A maximum amount of liability for the seller.

    • Survival Period: How long the R&Ws and indemnification rights will last after the closing. As the buyer, you want this period to be as long as possible.

H. Closing

  • This section details the date, time, and location of the closing and lists the documents to be delivered by both parties at that time.

Buyer's Strategic Approach

  • What to Do Start with a Letter of Intent (LOI): Before the full agreement, a non-binding LOI can outline the key terms and allow you to proceed with due diligence.

  • Conduct Thorough Due Diligence: The information you gather during due diligence will inform the representations and warranties you demand in the agreement.

  • Engage Legal Counsel: A business attorney is not an option; it is a necessity. They will draft and negotiate the agreement, ensuring that your interests are protected and that you understand all the legal implications.

  • Engage a Financial Advisor/Accountant: They will help you review the business's financials, understand the purchase price, and structure the transaction from a tax perspective.

  • Think about the "What Ifs": The agreement is designed to address potential problems. Think about what could go wrong and ensure the contract has a solution (e.g., what if the seller's biggest customer leaves? What if a key employee quits?).

A well-drafted business purchase agreement is the foundation of a successful acquisition. It should be a robust document that protects the buyer from future surprises and gives them clear remedies if the business is not as it was represented.

For knowledgeable and experienced legal representation when purchasing a business, contact corporate business lawyer Christopher Neufeld at Chris@NeufeldLegal.com or 403-400-4092 / 905-616-8864.

 

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Business Acquisition Goals