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How to Write a Contract for the Sale of a Business

Mark Henricks

Selling a business involves a lot of paperwork and a good contract. A business sale agreement is a legal document that describes and records the price and other details when a business owner sells the business. It is the final step to transfer ownership after negotiations for the transaction have been completed. It may be necessary for the new owner to demonstrate ownership of the business and register the business with state and local authorities.

Parts of a Business Sale Agreement

Every business sale agreement differs in the details. But there are standard parts that almost any agreement will contain.

Parties

The names and locations of the buyer and seller will be clearly stated in the first paragraph or two of the contract. The name and location of the business being sold also need to be expressed in unmistakable terms.

Assets

The agreement will detail the specific assets being transferred. Physical assets may include real estate, vehicles, inventory, furnishings, fixtures, machinery and equipment. Financial assets such as accounts receivable and cash might also be transferred. Intangible assets could be the business name, goodwill and customer lists. If any assets are not going to be sold, this will also be spelled out.

Liabilities

If the buyer is assuming any liabilities by purchasing the business, these will be listed here. Liabilities might include taxes owed to local, state and federal governments, accounts payable and outstanding loans. A statement that the buyer is not assuming any unlisted liabilities is also often included here.

Terms

The sale price being paid by the buyer clearly is a key part of this section. Also included here will be the closing date of the transaction. Whether the price will be paid in a lump sum or installments will also be specified. If the buyer is putting up security or collateral, that will be spelled out here.

For tax purposes, the price section will also tell how the purchase amount will be allocated among categories as defined by the Internal Revenue Service. To only have to pay long-term capital gains taxes sellers typically prefer a stock or equity sale because they can treat the transaction as the sale of a capital and, thus, pay the long-term capital gains rate if a profit is made on the sale.

Disclosures

In this section both parties will reveal any potential impediments to the deal. Examples might include outstanding debts, pending lawsuits, obligations and fines.

Other Agreements and Documents

Various other agreements are often part of the business sale document. For instance, both parties may sign non-disclosure agreements. The seller may agree not to compete with the new owner for a period of time. Or the seller may agree to remain as an employee of the business working with the new owner for a set period.

Disputes

This section will describe any acts or conditions that would constitute a default or breach of the terms of the contract. An example of such an act could be the buyer failing to make a scheduled payment. Should a dispute arise, it will detail how it will be dealt with. For instance, it will say whether disputes will be resolved by arbitration or litigation. It may also name the legal jurisdiction where any lawsuits will be heard.

Notifications

Each party will provide a way for the other to notify them in case any matters need to be dealt with later. A standard approach is to provide an address for in-person notification or for delivering a certified letter.

Signatures

Signatures by the buyer and seller or their representatives are necessary to finalize the agreement and make it binding. The signatures also will be dated. In addition, business sale agreements are often witnessed and notarized by a notary public.

A business sale agreement is often accompanied by numerous other supporting documents. These may include a bill of sale, copies of leases, customer and supplier contracts. Intellectual property such as recipes, operating manuals, trademarks, copyrights and patents could be attached as well.

Pitfalls to Avoid

  • Failing to screen potential buyers. Candidates for taking over your business should be carefully vetted. Do they have a troublesome track record? Is there evidence that the potential buyer will be able to fulfill contractual obligations? Do background checks. Search for liens on the potential buyer’s properties and criminal reports and records.
  • Not having a confidentiality or non-disclosure agreement. This agreement must prohibit a potential buyer from disclosing sensitive information to third parties, including rivals. It also must prohibit the use of proprietary information to start or improve a competitive business. Finally, this agreement should prevent soliciting or hiring your employees.
  • Opting for seller financing. While it can be difficult to find a buyer who can pay the entire price with cash or with third-party financing, beware of becoming a lender. Lowering the price may be preferable to extending financing for the buyer. If there is no alternative to seller financing, lock in collateral to be forfeited in case of a default.

The Bottom Line

A business sale agreement represents the culmination of what may have been a long and difficult negotiation. It describes the consensus reached on the price and other details of the transaction. It helps ensure each party will do what was promised and get what they need out of the deal. And it provides a framework for resolving any differences that may crop up later.

Tips:

  • Consider talking to a financial advisor about whether selling or buying a business would be a good move in terms of your personal finances. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
  • Sale agreements for big, complex businesses may run to many pages and require the assistance of attorneys, accountants and other professional advisors. Smaller transactions may be adequately documented using standard templates of business sale agreements that can be found online.

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