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The 21st century executive

All You Need to Know About Company Purchase Agreements

Company purchase

Selling your company is an exhilarating experience, no matter if it’s your first or fifth time doing so. That said, you can always expect to have a lot on your plate until the transaction is finalized. Along with the paperwork, internal meetings, and negotiations, the company purchase agreement is one of the most critical parts of the selling process.

A company purchase agreement is a contract between the seller and the buyer that lists all the critical components of the acquisition. The agreement will cover the company’s purchase price, company value, associated assets, financial statements, and more. 

For the acquiring company, the company purchase agreement safeguards their investment and increases the amount of trust they have in you, the founder and/or business owner. At the same time, this agreement should be more than a statement of goodwill. It should also protect your interests. 

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How to sell your company

Before we get into the agreement’s details, let’s discuss how you can sell your company.

You can sell your business in two ways. The most common method is with an Equity Sale, where you sell your existing business wholesale to another company. However, you can also choose to sell the assets related to your business through an Asset Sale.

This article primarily focuses on Equity Sales. Regardless of the option you choose, you should prepare your company for the Mergers and Acquisitions (M&A) process by following these steps:

  1. Determine the value of your company
  2. Organize your financials 
  3. Commit to due diligence for your own company
  4. Identify a trustworthy business broker
  5. Pre-qualify potential new owners

While a business broker isn’t mandatory for this process, it can help to have an experienced individual guide you through it. They typically charge a 5-10% commission and will focus on preparing your business for an exit. 

Once you have lined up a couple of buyers with solid synergies, you can move on to establishing the transaction details. At this point, you’ll want to get started on the company purchase agreement. 

What exactly is a company purchase agreement?

Sometimes called a Business Transfer Agreement or an Offer of Business Agreement, a company purchase agreement details the deal’s structure and sets out additional provisions and guarantees. 

As the business seller, you will need to draft the company purchase agreement and negotiate the terms with your buyer. The purchase agreement should include the following general sections:

  • Definition of terms
  • Confidentiality agreement
  • Exclusivity agreement
  • The actual sale and purchase agreement
  • Disclosure
  • Tax deed

You can use a template or sample purchase agreements as a starting point, and you should verify that the aspects set out below are reviewed in detail.

1.   Structuring the sale and reviewing your company

As previously mentioned, you can choose to arrange either an equity sale or an asset sale. In an equity sale, you sell your ownership stake to the buyer. On the other hand, an asset sale involves selling your core company assets such as patents or equipment. In both cases, you must provide a fair value of all your assets to determine the company’s value as a whole. 

Another common consideration is whether to restructure your company during a business sale. This involves reviewing your tax framework, assets, liabilities, share structure, management team hierarchy, employee benefits and pensions, and other significant business frameworks to make potential adjustments. 

The overall objective should be to make your business as attractive for sellers as possible. This could mean reducing liabilities, such as paying debts and finding ways to reduce risk or increase sales. 

2.   Due diligence

Everything from cash flow to company shareholders, third-party vendors, and tax returns is documented during the internal due diligence process. You will also want to create an organized file for your new business structure, setting out any changes, business history, copyrights, earnings, and other critical organizational and financial information.

Work together with your accountant, company shareholders, and attorney to review the information and confirm that your business is compliant with local and regional regulations. 

The potential buyer will also be carrying out their own due diligence on your company, so the more information you have on your business, the better. 

3.   Warranties, indemnities, and disclosure

Warranties, guarantees, indemnities, and disclosures are also specified in the company purchase agreement. These sections can include clauses for exclusivity, confidentiality agreements, non-solicit, and non-competes.

This section of your purchase agreement will be the most contested and negotiated—and for a good reason. Adding warranties to the contract is meant to safeguard the buyer and limit your scope of responsibility. 

There are a couple of ways to protect yourself from claims, including:

  • Time limits on claims
  • Minimums for claims to be covered
  • Thresholds to be reached before a seller is responsible
  • Maximum amounts the seller is liable for

Closing the deal

Once you and the buyer have agreed upon the company purchase agreement, all that’s left is to close the deal. The buyer generally makes the payment on the closing date, and the seller then provides the Bill of Sale.

At this point, you will need to provide some additional assurances. These are binding statements confirming that:

  • There are no judgments, liens, or other pending legal actions against your company
  • You have not entered into another contract with another buyer
  • You agree that the business is solvent
  • You are the owner of the business, and you will transfer it to the buyer

No additional charges or changes should be made on the closing date. 

Next steps

It’s impossible to sell a company without a company purchase agreement. From company valuation to closing, being engaged in the agreement process will ensure that you protect your interests. 

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About the author
Elena Leralta

Working as Foreworth’s Chief Financial Officer, Elena possesses a wealth of knowledge on business management and finance owing to her over 20 years of experience working in the financial sector.

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