Negotiating a Purchase Agreement

This article focuses on several important things a buyer should consider when negotiating a Purchase Agreement.

The buyer will learn important information about the property owned by the business (through the buyer’s due diligence investigation), as well as about related liabilities and obligations.  This information will help shape the terms of the Purchase Agreement, such as a clear identification of the property being purchased and the liabilities being assumed, if any.  Generally, a buyer would prefer the description of the property being acquired to be very broad, though, in some cases, there may be assets the parties do not want the buyer to acquire.  Equally as important is clearly identifying all liabilities or obligations the buyer is willing to accept as a part of the sale (for example, how would existing property and real estate leases be handled if the lease arrangements are not satisfactory to the buyer?).

To give peace of mind to the buyer that they did not miss anything in its investigation, the buyer should require the seller to make certain statements and promises in the Purchase Agreement about the business (in legal terms, these are referred to as “representations and warranties”).  As examples, the seller’s statements and promises may include confirmations that (i) the seller owns the property being acquired, (ii) there are not any liens or other ownership defects concerning the property being acquired, (iii) the acquired property is in good working order, (iv) the financial records and reports of the business are accurate and complete, and (v) there have not been any lawsuits initiated or threatened against the business.

The seller’s statements and promises work hand in hand with the “indemnification” provisions included in a Purchase Agreement.  Indemnification provisions give the buyer legal options in the event the seller’s statements are not true, or the seller does not keep its promises.  One option would be to include an obligation on the part of the seller to reimburse the buyer for monetary damages the buyer suffers.  Another option would be for the buyer to have the right to rescind (or cancel) the Purchase Agreement, even after the sale has been consummated.  Depending on the particular deal, many different options may be included in the Purchase Agreement for the buyer’s benefit.

There are many important considerations when preparing a Purchase Agreement, especially when it comes to protecting the buyer.  If you are a prospective buyer of a business, be sure to visit with a competent business attorney and accountant before entering into a Purchase Agreement to help ensure you are protected.