Business transaction starts with due diligence investigation and negotiation. Usually the prospective buyer makes a written offer (Letter of Intent) that sets the broad parameters of the negotiated deal. The negotiated deal must include consensus regarding price, payment structure, price allocation and all other details that comprise the final deal.
Once all the terms of the offer are accepted by both parties a Purchase-and-Sales agreement is drawn up. The agreement must be drawn up by an attorney who specializes in commercial law possibly with the assistance of an accountant and business broker. The details of the Purchase-and-Sales agreement must be based on the accepted offer. Banks (lenders) also need the agreement signed by both parties to analyze the deal and issue loans.
PURCHASE-AND-SALE AGREEMENT (P&S)
The Purchase-and-Sale (P&S) agreement is a contract that shows the buyer has decided to acquire the business and the seller has decided to sell the business for a certain price within a certain period of time. This document covers everything negotiated and listed in the letter of intent (term sheet).
The P&S agreement is legal and binding once it is signed by both parties. It is the conclusion of in-debt investigation and due-diligence by the buyer and seller. At this point the seller has determined the buyer has the financial and business capability to see through the transaction. The Purchase-and-Sale agreement can be several pages with exhibits and attachments that address all the necessary points to be covered. It is important for the buyer and seller to understand the elements covered in the agreement. Listed below are a few items covered in the P&S agreement.
|Buyer, Seller and Business Names||Names of the business buyer, business seller and the name and location of the business.|
|Asset Inclusion and Exclusion||List of assets included with the sale of the business. Assets include equipment, machinery, inventory, accounts receivable (AR), brand (business name), goodwill, real estate and so on. The P&S agreement shall also list all items that must be excluded from the agreement cash and real estate.|
|Price||The total purchase price for the business. This section must breakdown the price into its component including down payment.|
|Closing Date (Time frame)||Closing date for the business transaction. It can take 3 to 6 months to get a commercial loan, so the closing date must be a few weeks away.|
|Liabilities (Accounts Payable)||The business seller usually retains responsibility for Accounts Payable (AP). All current business loans must be re-paid by the seller so that the new owner has clear titles on all assets. If the buyer takes on any expenses it should be reflected in the selling price.|
|Accounts Receivable||Accounts Receivable (AR) that is money owed to the business is also typically retained by the seller. In some cases the AR may be sold with the business by adjusting the selling price higher. If the AR is sold with the business the seller must provide a detailed list containing amounts, counter party details and expected dates.|
|Payment Terms||This section includes the amount of cash that will be paid on the closing day, deferred payment scheme and seller financing details.|
|Inventory||Contains list of all inventory items included in the sale. The inventory should be counted when the agreement is created and once again just before the deal closes.|
|Seller Agreements||This section usually includes non-compete covenant, inspection reports (federal, state and local, environmental) and other actions required by the seller such as repairs and transfer of licenses.|
|Taxes||Taxes due should be paid by the seller before the closing date.|
|Escrow Agreements||Escrow Agreements are created only if there is an outstanding obligation where some work needs to be done by the seller after the closing date. In this case money is held in an escrow account and released when the obligations have been satisfied.|
|Seller’s Representations and Warranties||This one of the important parts of the agreement. It is used to ensure the seller has provided correct business information through the due-diligence process.|