The Anatomy of a Business Purchase Agreements

Two businessmen signing business purchase agreements
Business Purchase Agreement

What is a Business Purchase Agreement?

Also known as Business Transfer Agreements and sometimes Buy-Sell Agreements, Business Purchase Agreements are legally binding contracts that protect both the seller and buyer in the purchase of a business.  Business purchase agreements are used in acquisition or sale of service oriented businesses, restaurants, apartment buildings, retail and commercial properties. This contract legally transfers over the ownership of a business from a seller to a buyer.  It also contains the terms of the sale, sales price, taxes and liabilities, and optional clauses intended to protect the seller or the purchaser before, during, and after the business transaction.

 

Terms of Sale, Sales Price, and Closing the Deal

Arguably the most important part of the agreement involves the terms of the sale, the actual price of the sale, and closing; this is when the final amount is fully transferred from the buyer to the seller. The contract should list items incorporated in the sale, including physical and intangible assets such as business records and intellectual properties. Keep in mind, if you are purchasing a business, you may need to finance all or part of the Purchase Price through a bank. All of this, along with the type of payment (cash, check, or credit card), will be included under the terms of the sale.

Possession and Operation of Your New Business 

The buyer generally takes possession of the business and is legally allowed to operate it on the agreed closing date.  On the closing date, typically the seller will deliver to the purchaser all of the assets under the terms of sale, clear of any rights of third parties or any other encumbrances.

 

Escrow

The buyer may opt to create an escrow account with part of the Purchase Price.  An escrow account would protect the buyer for seller’s liabilities after closing.   The money is deposited with a third party for a specific term. During that time, the buyer may use it for claims, taxes or other debts of the Seller as agreed to by the parties in the Purchase Agreement.

 

 

Taxes Involved in Inquiring a New Business

The parties may agree to the responsibilities of the buyer and the seller for taxes in the purchase agreement.  Typically, before the date of closing, the seller is liable for all taxes and following the date of closing, buyer is liable. These taxes comprise of:

  • Personal Property Taxes: Counties may tax businesses for personal properties.  Also referred to as Tangible Assets Taxes, this is a tax on a business’s physical assets such as machinery, equipment, and furniture. The buyer and seller may negotiate a fair value of the business’ tangible assets in order to reduce unnecessary implications for both parties.
  • Real Property Taxes: Also paid to the county, this is a tax on the physical building and or the land the building resides on.
  • Franchise Tax: Each taxable entity formed in Texas or doing business in Texas must file and pay franchise tax. Franchise tax is based on a taxable entity’s margin. Unless a taxable entity qualifies and chooses to file using the EZ computation, the tax base is the taxable entity’s margin and is computed in one of the following ways:
  • total revenue times 70 percent;
  • total revenue minus cost of goods sold (COGS);
  • total revenue minus compensation; or
  • total revenue minus $1 million (effective Jan. 1, 2014).
  • Federal Income Tax: Tax burden for federal income taxes heavily depend on the legal entity of the business, such as a sole proprietorship, LLCs, or a corporation.

 

Non-Compete Clause and Why it is Important

As a business owner, the noncompetition clause is extremely pertinent to your business’ success and prevents the seller from impeding on your potential profits. This clause hinders the seller from starting a similar business within a certain radius for a certain amount of time.

 

Indemnity Clauses
In a Business Purchase Agreement, the seller and buyer may agree to indemnify each other for damages arising from their actions.  For example, the buyer may agree to cover the seller’s losses, debts, damages, or injuries arising from the buyer’s operation, practice or ownership of the business. Similarly, the seller may also agree to indemnify and hold harmless the buyer from any claims, losses, or damages arising from the Seller’s operation the business.

 

Leases and Titles

If the business is located in a building with a lease, there needs to be written consent from the landlord and the lease must be assigned to the buyer. In the case of full transfer of property ownership, there must be a clean title for real estate and a title company will ensure proper transfer of title.

 

Inspections of Your Business Property

The buyer should perform inspections of any real estate being purchased.  The bank financing the transaction would also require proper inspections. Failure to conduct inspections creates unnecessary risks for the buyer.

Sample Business Purchase Agreements:

Here’s an example of a business sale agreement
https://www.sec.gov/Archives/edgar/data/1172852/000119312506172832/dex1024.htm

 

Contact FT Law Firm today for assistance with your business purchase agreement.