How to Structure Purchase and Sale Agreements for Business Success
A purchase and sales agreement (PSA) is a legally binding contract used when buying or selling real estate, businesses, or even products and services. It is important to have it done right so that you are protected and your sale can go on without a hitch.
McFarland Ritter Law Firm in Boise, ID specializes in building and protecting businesses, including purchasing and selling such. Let’s go over what we will do when we create a PSA and how it will create success for your business’s future.
Key Elements of a Purchase and Sale Agreement
When creating a purchase and sale agreement, we need to have things in line to reach your goals and keep you secure in your purchase/sale. Each one of these elements will ensure all parties are taken care of.
1. Identify all Parties Involved
One of the most important things you will need is to have clearly identified the buyer and sellers, including their legal names, business entities, and contact details. Having incorrect names listed on the purchase contract can lead to legal disputes.
2. Describe the Business Assets
Being specific in what the sale includes; entire business, certain assets, stock or equity, etc. A detailed list of assets being transferred should also be included to avoid later disputes (such as real estate, equipment, intellectual property, customer lists, etc).
3. Purchase Price and Payment Terms
Include the total purchase price and how it will be paid. This could be in one lump sum, several installments, or even seller financing.
4, Due Diligence Period
A due diligence period allows buyers to verify the business’s assets, liabilities, and overall business health before completely committing to the purchase. It is recommended for buyers to examine financial statements, employee contracts, tax records, and any litigations. Sellers should ensure all disclosures are made to avoid potential legal disputes down the road.
5. Representations and Warranties
Both parties should provide statements to ensure their transparency and build trust. These statements should include their legal standing, business operations, financial well-being, and ownership of any assets.
6. Conditions Precedent
A PSA should include any conditions that should be met prior to closing. This includes things like financing contingencies or third-party consents.
7. Covenants and Restrictions
Include things like any non-compete clauses, confidentiality agreements, and after-closing obligations. This can protect both the buyer and the seller.
8. Closing Details
The closing details include the date, location, and each step of the process for finalizing the transaction.
9.Dispute Resolution
Should there be any disputes, this section should outline the process you’ll take to resolve them such as mediation, arbitration, or litigation to prevent legal battles.
10. Indemnification and Liability
Establish who is responsible for certain liabilities like any outstanding debts or pending lawsuits. This helps allocate risks between both parties.
Common Pitfalls to Avoid
One of the most important things you can do in any legal document is be specific. Using vague or ambiguous language in a contract can lead to misunderstandings and misinterpretations. Whether it is big or small, the last thing you want is to think you purchased a piece of equipment only to find out that it wasn’t included. Or to assume the buyer was going to handle the ongoing lawsuits further only to find out they weren’t. Here are other pitfalls you want to be sure to avoid in your PSA:
- Failing to define the post-sale obligations and liabilities.
- Overlooking tax implications that may affect the sale.
- Rushing through due diligence, potentially missing crucial information.
Each of these pitfalls was mentioned in the “Key Elements of a Purchase and Sales Agreement” because they are crucial to the success and ease of the sale. One more common pitfall is failing to involve experienced legal professionals in the drafting process.
Why Hiring an Attorney is Crucial
Yes, you can draft a PSA on your own. But, creating one without legal guidance can expose you to significant legal, financial, and operational risks. Business sales involve complicated legal jargon and regulatory requirements, both of which attorneys are trained to handle. With much experience in drafting purchase and sales agreements, you are better off hiring a professional.
The DIY approach is extremely risky – even more so for deals that involve significant assets, legal liabilities, or industry regulations. Hiring the right attorney will ensure you don’t miss important details in all of the “key elements” mentioned before.
Risks of not hiring an attorney:
- Unclear purchase contracts: You may draft an agreement that lacks clarity or is unable to be legally enforced.
- Legal Compliance Issues: Regulatory approvals, licenses, and permits may be required.
- Insufficient Due Diligence: Again, you don’t want to assume unknown responsibilities. This can happen if due diligence isn’t structured properly.
- Poorly Structured Warranties and Indemnities: You may over-promise as a seller or fail to secure proper indemnification as a buyer. This could leave you financially vulnerable.
- Inadequate Dispute Resolution Clauses: If the dispute resolutions are not clear, conflicts can be long, expensive processes.
- Fail to Address Tax Implications: The way a deal is structured (asset sale vs. stock sale) has huge tax implications. Don’t get yourself on the wrong side of that one.
The Best Attorneys for Your PSA
A well-drafted purchase and sale agreement is essential for protecting your business interests and ensuring a successful transaction. With so many important things at risk, save yourself the stress and hire McFarland Ritter Law Firm to handle your business sales contracts. You worry about your other business agreements, let us handle the legal agreements.
Our experienced team of attorneys can provide expert guidance in drafting and negotiating PSAs tailored to you and your business needs. Contact McFarland Ritter today. We proudly serve Boise, Meridian, Nampa, Caldwell, Eagle, Kuna, Emmett, and more in the Treasure Valley, Idaho.