What are the Key Elements of a Purchase Sale Agreement for a Business?
A Purchase Sale Agreement is the legal document that specifies all of the terms and conditions associated with the purchase and sale of a company or the assets. The document outlines the price, the payment method (For example, cash or debt), the representations and warranties, and any conditions. Once signed by the buyer and seller the purchase price is forwarded to the seller and the deal is considered closed. The key provisions or sections of a purchase sale agreement are summarized below:
A Description of the Parties: The purchase of a business or assets has a buyer and a seller and both parties are named in the agreement. The parties are the participants who sign the contract so you should make sure that the name or names in this section represent the people or entities that should be listed as the responsible parties for the contract.
A Description of the Item Being Sold and an Agreement to Sell: A purchase sale agreement will always identify what is being sold and also what the financial terms of the agreement are. This section will indicate whether equity or assets is being sold and will also state the purchase price. The method of payment must also be specified and this will usually either be cash or some form of debt (For example, a Promissory Note). If debt is used, this section will usually refer to an Appendix that provides additional details related to the financing. (For example a payment schedule and an interest rate description). This section may also describe any SEC or other transfer restrictions and the assets or equity.
Representations & Warranties: Both sides provide statements that are incorporated in to the Agreement that describe what they are representing. This avoids “puffing” on the part of the parties as the parties are required to write down exactly what they are attesting to. The seller’s representations are usually much more extensive as they are the party selling the business and they have all of the facts and details related to the business. The seller claiming that the assets of the business are being sold free and clear of any lien or encumbrance is an example of a seller representation.
The buyer’s representations and warranties are usually limited to its ability to consummate the transaction, its solvency and investment representations required for compliance with applicable securities laws. An example of a buyer representation is as follows:
Buyer is a corporation duly organized, validly existing and in good standing under the Laws of the state of New York. Buyer has full corporate power and authority to enter into this Agreement and the other Transaction Documents to which Buyer is a party, to carry out its obligations hereunder and to consummate the transactions contemplated hereby.
The Seller may also include certain disclosures that may be relevant or a statement that the company is being sold “as is.” The key here is that ANYTHING that either party is relying on must be in writing in the Purchase and Sale Agreement.
Covenants after Closing: If the closing is to occur after signing the purchase and sale agreement, the it is customary to include covenants to protect the business and operations and to limit the amount of new liabilities the company may take on. For example, these covenants usually require the seller to continue to operate the business in the regular fashion and to inform the buyer of any material changes.
Closing Conditions: Closing conditions are conditions which must occur before the parties are obligated under the terms of the Purchase and Sale Agreement. These are determined largely by what consents and approvals are needed and may include, for example, the satisfactory termination of due diligence.
Restrictive Covenants After the Closing: The Purchase and Sale Agreement also usually includes covenants that restrict the operations of the business. These are included in order to protect the business and operations of the company after closing. These fall into three basic categories: a) non-solicitation of customers; b) non-solicitation of employees; and c) competition. These provisions must be carefully drafted with an attorney to make sure that the provisions are enforceable.
Boiler Plate Language: Purchase and Sale Agreements will also all contain boiler-plate language that addresses a number of different legal aspects. Some of the boilerplate language includes:
- Which Governing law applies
- A statement indicating that the document represents the entire agreement between the parties
- A statement regarding headings and organization and their impact
- A statement that if one part of the agreement is deemed not valid, the rest of the agreement is valid
- A statement of how modifications to the document must occur (usually in writing)
- A statement regarding how notices, law suits and expenses should be handled
Signature: Agreements are not enforceable unless signed. As such, the Purchase and Sale Agreement must contain a section where both parties sign. While notarizing the agreement is recommended, it is generally not required.
It is important for a buyer to understand the contents of a purchase and sale so that a buyer understands what they are buying, what to expect, and where to negotiate. This is why the assistance of a qualified attorney is essential.
Ian E. Scott is a Harvard Law School Graduate, lawyer and author of Law School Lowdown: Secrets of Success from the Application Process to Landing Your First Job. You can access the blog for this book by clicking here. Mr. Scott worked as a corporate litigator in the law firm Cleary Gottlieb and currently runs his own law firm Scott Legal, P.C. specializing in Immigration Law & New Business set-up.
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Ian E. Scott, Esq. is the Founder of Scott Legal, P.C. He can be reached at 212-223-2964 or by email at firstname.lastname@example.org.
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