A business purchase agreement is the contract that spells out exactly what you are buying, for how much, and what happens if something goes wrong.
What a business purchase agreement does
Everything you learned during the search and the due diligence has to end up in writing, and this is where it lands. The letter of intent sets the broad terms. The business purchase agreement turns them into binding promises from both sides. If a promise is not in the agreement, you may have a hard time enforcing it later.
I am not an attorney, and this is general information, not legal advice. Deals vary by state and by structure, so have an attorney who handles business sales draft or review the agreement before you sign. No smoke. No mirrors. Here are the terms I would read most closely.
Key terms in a business purchase agreement
Every agreement is different, but most cover the same ground. Read each of these slowly:
- The parties, meaning exactly who is buying and who is selling, including any legal entities
- The purchase price and how it will be paid, including any deposit, seller note or earnout
- What is included, such as equipment, inventory, the name, the website, phone numbers and customer lists
- What is excluded, including cash, certain debts and personal items
- Representations and warranties, which are the seller’s statements about the business
- Closing conditions that must be met before the deal completes
- Indemnification, which says who pays if a stated fact turns out to be wrong
- A non-compete and non-solicitation promise from the seller
- The transition plan, including how long the owner will help you
Assets or stock in your business purchase agreement
One early decision shapes the whole document: are you buying the assets of the business or the company itself? In an asset purchase you pick which assets and liabilities you take. In a stock or equity purchase you take the company as it is, including its past. The tax and liability results differ, so our asset sale vs stock sale explainer is worth reading before you talk with your attorney.
Representations, warranties and indemnification
This section does the most to protect you after closing. The seller states facts about the business, such as that the financial statements are accurate, taxes are paid, there is no hidden lawsuit and the equipment works. If a statement turns out to be false, the indemnification terms decide who covers the loss, how much and for how long.
Ask your attorney how long these promises last and whether part of the price is held back to back them up. Vague wording here is where many disputes begin.
Price adjustments and contingent payments
The price on the cover page is rarely the whole story. Many agreements include a working capital adjustment that settles the difference between expected and actual working capital at closing. Some include an earnout, where part of the price depends on how the business performs after the sale. Both can be fair, and both need exact definitions. Our guides on the working capital adjustment and the earnout agreement explain how each one works.
Non-compete, transition and what happens after closing
A seller who walks away and opens next door can wreck what you just bought. A non-compete agreement limits that, and the rules on what is enforceable vary by state, so get advice on yours. Pair it with a clear transition plan that says how many hours the owner will help and what they will teach. Our guides on non-compete agreements and the seller transition period cover both.
Mistakes I would avoid with a business purchase agreement
These are the ones that cost buyers the most:
- Using a free template without having a lawyer adapt it to your deal
- Signing before due diligence is finished, then hoping for the best
- Leaving key terms, such as what is included, as a verbal understanding
- Ignoring the closing conditions and the dates attached to them
- Forgetting the lease, licenses and permits that must transfer
Where the agreement fits in the bigger process
The agreement is step eight or nine in most deals, after you have found the business, checked it and agreed on price. If you are earlier in the process, our steps to buy a business roadmap shows the full sequence, and our guide on how to buy an existing business covers due diligence in more depth.
Related reading on the business purchase agreement
- Letter of Intent for a Business Purchase: What It Should Say
- Asset Sale vs Stock Sale: How They Differ in a Business Deal
- Non-Compete Agreement When Selling a Business Explained
- Seller Transition Period: How to Make the Handover Work
- Working Capital Adjustment in a Business Sale Explained
- Earnout Agreement: How It Works in a Business Sale
- How to Buy an Existing Business: A Due Diligence Guide
- IRS guide to the sale of a business
- Due diligence overview on Wikipedia
- Contract law overview from Cornell Law School
- Harvard Business Review on entrepreneurship
