When the due diligence investigation that follows a buyer’s purchase proposal comes to a successful conclusion, it’s time to move into the final–and very important–negotiations that precede a sale closing.

By this stage in the sale process:

  • A buyer has chosen to acquire your business.
  • The buyer’s in-depth investigation has confirmed the purchase decision, and your own due diligence has confirmed that the buyer has the financial and business capability to complete the transaction.
  • Now it’s time to reach consensus regarding price, payment structure, price allocation (and the resulting tax implications), and all the other details that comprise the final deal.

It’s important for you to understand exactly what’s in a purchase and sale of business agreement so you’ll know what to expect, where to negotiate, and why it’s so important to call on the expertise of your accountant, your attorney, and your broker, if you’re using one.

Step 1. Understand what a purchase and sale agreement covers.

The following chart describes the contents of the closing agreement. Be aware that this list provides only a framework and general definition of an agreement’s contents. Behind many of the items lie details that require advice from trained legal experts, which is why your broker and your attorney are key partners at this stage.

  • For the simplest sales–those involving very few and uncomplicated assets and a selling price of tens of thousands rather than hundreds of thousands of dollars–fill-in-the-blanks forms can be downloaded from online sites. Just enter “purchase and sale of business agreement” in a search engine for a range of options. Before using agreement forms, however, call on the expertise of your attorney. Requirements vary from state-to-state and you need to be sure the agreement you sign complies with the letter of the law in your region.
  • For all other sales, expect the sale agreement to span many pages and to be accompanied by exhibits and attachments that address all the necessary points to be covered. Your broker will guide the process if you’re using one. Otherwise, either your attorney or the buyer’s attorney will write the first draft and the other attorney will review and suggest amendments–unless you and the buyer agree to both work with and split the legal fees of a single attorney.

SALE AGREEMENT CONTENTS

Names

Names of the seller, buyer, and business including the location of each.

Assets

List of all assets included in the sale including fixtures, furnishings, equipment, machinery, inventories, accounts receivable, business name, customer lists, goodwill, and other items; also includes assets to be excluded from the sale, such as cash and cash accounts, real estate, automobiles, etc.

Liabilities

List of liabilities being assumed by the buyer, often including accounts payable; also includes a statement that the buyer assumes no liabilities other than those listed.

Closing date

Statement of the date the sale will close.

Price

Statement of the purchase price and how the buyer and seller agree to allocate the price among IRS-determined asset classes.

Adjustments

Detail of how the price will be adjusted on closing day to reflect prorated business expenses and, if inventory and accounts receivable are being sold, to reflect closing-day valuations.

Seller agreements

Detail of non-competition or covenant not-to-compete agreement, management consulting agreement, or the employment agreement that the seller will sign as part of the closing deal.

Payment terms

Description of the amount of cash to be paid on closing day, the amount payable following terms detailed in a promissory note, and the amount to be paid in other, defined future payments.

Security agreements

If a portion of the purchase price will be paid through deferred payments, the agreement will include a description of buyer-owned assets listed as loan collateral; personal guarantee requirements if any, and business-operation requirements to protect against business and asset devaluation before price is paid in full.

Inventory

A list of all inventory included in the sale.

Accounts receivable

A description of accounts receivable included in (or excluded from) the sale, accompanied by a description of how payments for collections will be applied and how uncollected receivables will be handled.

Seller’s representations and warranties

A statement verifying the seller’s power and legal right to authorize the sale; that the seller has clear and marketable title to assets being transferred; that financial records presented fairly reflect the financial condition as of the date of the statements; that the seller knows of no obligations or liabilities beyond those disclosed as exhibits accompanying the purchase agreement.

Buyer’s representations and warranties

A statement verifying the buyer’s power and legal right to authorize the purchase; warranties that statements made by the buyer and buyer’s guarantors contain no untrue statements or omissions.

Seller’s covenants

A statement of provisions the seller will undertake to transfer the business including transferring employee benefit plans, paying employee wages through the closing date, changing the seller’s business name to permit the buyer to legally assume and begin using the name, and other agreed-upon actions.

Employee termination clause

A statement confirming that on closing day seller will terminate all employees except those with transferable contracts, paying all wages, commissions, and benefits earned through the termination date, at which time the buyer will likely complete paperwork to hire terminated employees through the buyer’s new business, which will have a new federal employee identification number (FEIN).

Post-closing rights and obligations

A statement of after-sale issues, likely including the buyer’s right to offset the purchase price by liabilities or inventory valuation variances that become apparent after the settlement date; and the buyer’s obligation to fulfill specified requirements such as carrying insurance, maintaining specified working capital levels, and allowing the seller to access financial records until the purchase price is paid in full.

Default provisions

A definition of litigation and dispute resolution provisions for dealing with defaults should either the buyer or the seller not fulfill the terms of the agreement.

Business transfer agreements

These agreements include the bill of sale; assignments of leases, contracts and intellectual property; stock transfer (for entity sales); statement of compliance with state bulk sales law requiring supplier notification (for asset sales).

Participation or absence of brokers

A statement of whether or not brokers or finders were involved in the transaction and, if so, how they’ll be paid, which is usually stipulated in the broker agreement and usually paid by the seller on closing day.

Obligation for fees

A statement of how the buyer and seller will pay professional fees involved with the sale closing.

Step 2. Prepare to negotiate the details.

The preceding chart leaves little doubt that the purchase agreement is detailed and extensive. It’s also the basis of negotiations between you and your buyer–not only about price, but also about exactly what’s included in (and excluded from) the purchase and how the agreed-upon payment will be paid and allocated among IRS-defined asset categories.

In next week’s installment of “Selling Your Small Business” we’ll go over the financing and tax implications of a sale.

Editor’s Note: This article is the nineteenth piece in a series taken from BizBuySell.com’s Guide to Selling Your Small Business. The guide is a comprehensive manual to help small business owners maximize their success when the day to sell arrives. Each Wednesday, Inc.com will publish a new section of the guide outlining BizBuySell.com’s best practices, from the initial planning stages of a sale all the way through negotiations and post-sale transition.