The Basics of a Business Purchase Agreement
By Don Beezley ©2025
Once a deal is going forward after you’ve signed a Letter of Intent (“LOI”) for the sale of your business, and Due Diligence is either completed or well under way, the actual purchase contract for your business will begin to be drafted. The buyer’s attorney will typically proffer the initial, proposed purchase contract.
To this point, the parties have had limited obligations beyond proceeding in “good faith” in pursuit of the deal envisioned by the mutually agreed upon LOI.
Now, the rubber begins to meet the road.
The Purchase Agreement is what will create the legally binding contract between the parties for the purchase and sale of the business interest (assets, equity, etc.). Typically, the Purchaser will prepare/offer the initial draft as the “formal, binding offer” for the purchase. It will codify the terms of the LOI, but include numerous additional, legally binding provisions that govern what happens before, at, and after closing. While your LOI may have been 3-5 pages long, the “PA” may be 30-40 pages or more (especially with exhibits).
It’s critical you involve a qualified attorney for review of the purchase agreement, and that you understand each section of the agreement and the legal obligations it places on you. You must also utilize a qualified CPA to understand the tax implications of the sale.
A Purchase Agreement will be organized into a number of sections, typically called “Articles.”
Sample list of Articles and their purpose:
Article I, Definitions—this section defines key terms as they are used in the context of the Agreement. This Article may also be later in the Agreement or as an appendix.
Article II, Purchase and Sale—This section states specifically what is being sold—stock, assets, etc.—the price, and what needs to happen to effect closing.
Article III, Representations and Warranties of Seller—This section has significant implications for the seller. Many of the representations are fairly basic such as stating the seller really owns the business. However, the seller is also offering the buyer a “warranty” on the provisions in this section that they are true and accurate, and the seller will be legally and financially liable if they prove not to be.
Article IV, Representations and Warranties of Buyer—This section is the flip of the prior, however, it will have a lot less meat on the bones since the buyer has simpler representations to make.
Article V, Covenants—This section relates to more “operational” commitments such as a non-compete requirement, confidentiality about the deal, access to information by the parties, working capital requirements, conduct of the business prior to closing, and other material actions that need to be taken for the transfer of ownership.
Article VI, Tax Matters—Agreements on dealing with taxes such as timing and filing of taxes and indemnification (protection) for the parties for their respective tax responsibilities.
Article VII, Conditions to Closing—The essence of this section is that each party will take the actions needed to make it possible to close. It’s typically a list of 25-30 such actions, which are usually self-explanatory.
Article VIII, Indemnification—When you indemnify someone, you are basically protecting them against loss for your actions. This section has significant implications and needs to be understood by both the seller and buyer. Indemnification—for what, for how much, and over what timeframe—is often subject to intense negotiations.
Article IX, Termination—This section primarily governs when, how, and why the parties may terminate the Agreement.
Exhibits & Disclosures—Any number of additional documents can be attached to the Purchase Agreement and made a part of it. The terminology and structure will vary depending on the attorney who prepares the Agreement. Common terms are “Exhibits,” “Schedules,” and “Appendices.”
Some examples of exhibits would be a listing of accounts receivables or customers. Another example would be a schedule of working capital calculations. The letter of intent, financial statements, marketing plans, or customer and vendor agreements may all be listed.
The Agreement will also call for “Disclosures” by the Seller. The Disclosures interact with the Representations and Warranties. They are the actual things a seller is disclosing to the buyer that are of concern and need to be “disclosed” to the buyer. Perhaps the company is involved in a lawsuit, or the seller has reason to believe it could be; that needs to be disclosed. Presumably, anything negative about the business would’ve (and should’ve) been discussed with the buyer and not sprung on them in the Disclosure. The Disclosures may stand alone or be an “Exhibit.”
The two most important things:
- YOU must read and understand the Purchase Agreement to the best of your ability and ask questions of your various advisors. Do not simply punt it to your attorney and CPA.
- You MUST have the Purchase Agreement reviewed by your attorney and any applicable sections reviewed by your CPA. Both such advisors should have meaningful business transaction experience. Your divorce or estate planning attorney may not be an appropriate choice. You may also need a tax or retirement attorney. Your goal is an attorney who makes the deal better, not harder.
The preferred Purchase Agreement review process is as follows:
- Introduce your Proforma Partners M&A advisor/broker to your attorney. Communication is essential for a successful deal.
- Your M & A advisor/broker and you should review it first and make redline comments in the document. This NOT a legal review (unless your advisor is also your attorney and you have retained him/her for that purpose ). Your broker has been intimately involved in conversations with the buyer and seller that the attorney has not, knows what the business/financials terms of the deal are supposed to be, and has practical business experience with multiple negotiations and purchase agreements. This allows them to help the attorney be aware of any issues in the PA related to those business conversations. Ultimately, your independent judgement informed by your attorney’s opinion should be your guiding force.
- Attorney review. This is the most important step. The attorney will often take that first redline and alter and add to it, or do their own separate redline assessment of the purchase agreement.
Many brokers/M&A advisors will “tap out” of this part of the process. However, if they have actually done their job to this point, that’s a bad idea, as they may have more information and insight on the deal than anyone. Their relationship with the buyer should also make them invaluable in helping to negotiate and resolve issues with the Purchase Agreement. I once had a buyer tell me, “Don, you’re a great broker. A lot of brokers would’ve stepped out and said, ‘call me when the CPA and attorney are done’.” That buyer called me recently after fifteen years, asking me to represent him as the seller. There are too many potential offramps for a deal, and a completely hands-off approach just isn’t wise for getting the deal closed.
Conclusion
Plenty of deals can fall apart at this stage. It requires good communications and a focus on managing the various relationships. A good M&A Advisor will be active in helping make that happen.
It’s the most important step for the seller in the sense that it sets the legally binding rules of the deal—what happens at close, and what liabilities or responsibilities live with the Seller after close.
NOTE: Nothing herein should be construed as tax or legal advice. It is for educational purposes only and it is essential that any purchase agreement be reviewed by qualified tax, accounting and legal advisors.
Don Beezley is President of Proforma Partners, LLC and a Business Certified Appraiser (BCA) with over three decades of M&A, banking, and business operations experience.