What Should a Business Purchase Agreement Include?
When buying or selling a business in Florida, you can structure the transaction as an asset purchase or an ownership-interest purchase. An asset purchase involves acquiring specific business property, while an ownership-interest purchase involves buying shares or membership interests in the company. Your choice affects which assets and liabilities transfer and how the business transaction is taxed.
If you're buying or selling a business, you need to know exactly what the transaction covers before signing. Overlooking unpaid taxes, existing contracts, or financial obligations could leave you responsible for unexpected costs. You may also face disputes if the agreement doesn't clearly define each party's responsibilities.
Based in Orlando, Florida, Tax Planning Solutions LLC assists clients with legal and tax matters involving business transactions. It offers legal guidance that can help you understand the agreement's terms and identify potential risks before completing a purchase or sale. Contact the firm today to discuss your business purchase agreement.
1. Description of the Assets and Liabilities Being Transferred
Your agreement should identify the buyer, seller, and business being purchased. It should specify which assets and obligations you acquire and which remain with the seller. Include provisions addressing:
Transferred assets: Equipment, inventory, intellectual property, websites, and other business property.
Excluded assets: Cash, accounts, or property the seller will retain.
Assumed liabilities: Debts and contractual obligations you agree to accept.
Existing contracts: Leases, supplier agreements, and customer contracts requiring assignment or consent.
Outstanding taxes: Unpaid taxes, penalties, and interest associated with the business.
In Florida, you could become liable for certain unpaid sales taxes owed by the seller, even if your agreement assigns those debts to the seller.
The Florida Department of Revenue allows sellers to request a Certificate of Compliance and either party to request a transferee liability audit. Because a certificate reflects the seller's account status when issued, consider purchase-price withholding or escrow arrangements to address unresolved liabilities.
2. Purchase Price and Payment Terms
Your agreement should state the total purchase price, payment deadlines, and payment methods. Address deposits, financing, installment payments, and closing adjustments.
Suppose you agree to purchase a business for $400,000, including $50,000 in inventory. If the inventory is worth only $35,000 at closing, an adjustment clause can establish whether the price decreases by $15,000.
For qualifying asset acquisitions, you must allocate the purchase price among the acquired assets for federal tax purposes. This allocation affects your tax basis and the seller's taxable gain or loss. Both parties generally must report qualifying transactions using IRS Form 8594.
The firm’s business law attorney, Waheeda Ghani, can review purchase-price allocations and payment provisions to help you understand potential tax obligations before closing. She can also identify unfavorable payment terms, unclear liability provisions, and obligations for existing business debts, helping you avoid unexpected expenses and disputes after the purchase.
3. Representations and Warranties
Representations and warranties are contractual statements about the business's ownership, finances, and operations. They establish what each party promises is accurate at specified points in the transaction. Require the seller to address:
Financial records: Whether financial statements accurately reflect the business's condition.
Ownership: Whether the seller owns the property or interests and has authority to transfer them.
Debts and litigation: Whether the seller has disclosed outstanding obligations, lawsuits, or investigations.
Taxes: Whether the business has filed required returns and paid applicable taxes.
Contracts and permits: Whether the seller has disclosed significant agreements and operating approvals.
Include disclosure schedules identifying exceptions to these statements. For example, the seller can disclose an unresolved lawsuit rather than promise that no litigation exists. Your agreement should explain how these disclosures affect your rights.
If the seller misrepresents the company's financial condition or breaches the agreement, you may have grounds to pursue a legal claim. Business litigation may be necessary if the dispute cannot be resolved through negotiation or other agreed procedures. Attorney Ghani can review the seller's representations and disclosure schedules to identify inconsistencies or missing information before you sign the agreement.
4. Closing Conditions and Requirements
Closing conditions identify what must happen before you and the seller must complete the transaction. These can include financing approval, satisfactory due diligence, landlord consent, and the transfer of important contracts. You should also determine whether operating licenses and permits can transfer or whether you must apply for new ones.
In Florida, corporations selling all or substantially all their assets outside regular business operations generally need board and shareholder approval. Other business structures have different authorization requirements. Specify the closing date, required documents, necessary approvals, and your rights if either party fails to satisfy a closing condition.
5. Noncompete and Confidentiality Provisions
A noncompete agreement restricts the seller from engaging in specified competing activities after the sale. You may request this protection when purchasing customer relationships, goodwill, or confidential business information.
Under Florida law, qualifying noncompete restrictions must be written, signed by the restricted party, and supported by legitimate business interests. Their duration, geographic coverage, and restricted activities must satisfy applicable legal requirements.
For example, if you purchase a local accounting firm, you might negotiate restrictions preventing the seller from opening a competing practice within an agreed area and period. Whether those restrictions are enforceable depends on their terms and applicable law.
Include separate confidentiality provisions addressing how each party may use or disclose customer information, financial records, and trade secrets.
6. Breach of Contract and Dispute Resolution Provisions
Your agreement should explain what happens if either party fails to fulfill contractual obligations, including breaches discovered before or after closing. Address termination rights, dispute resolution procedures, and indemnification, which requires one party to cover certain losses or claims suffered by the other.
If the seller fails to disclose an outstanding debt, an indemnification clause can establish whether the seller must reimburse you. Specify covered losses, financial limits, notice requirements, and claim deadlines.
Tax Planning Solutions LLC can review these provisions to help you identify financial exposure and negotiate protections against specified losses.
7. Due Diligence and Document Review Requirements
Due diligence means investigating the business before completing the purchase. Your agreement should identify which records the seller must provide, your review period, and whether unsatisfactory findings allow you to terminate the transaction. Before closing, review:
Financial statements: Compare revenue, expenses, and profits against supporting records.
Tax records: Check filed returns, payments, and outstanding assessments.
Business debts: Identify loans, liens, and unpaid invoices.
Existing contracts: Check whether important leases and customer or supplier agreements can continue.
Licenses and permits: Determine whether you need new operating approvals.
Employee obligations: Review unpaid wages, benefits, and employment agreements.
Legal disputes: Investigate lawsuits, government investigations, and potential claims.
If you discover inaccurate financial records or undisclosed liabilities, review your termination and renegotiation rights. You cannot automatically cancel the purchase unless your agreement or applicable law permits it.
Contact Tax Planning Solutions LLC About Your Business Purchase Agreement
Your purchase agreement should clearly establish financial responsibilities, closing obligations, and remedies for disputes. Reviewing these provisions before signing can help you address liabilities and avoid disagreements after the sale.
Based in Orlando, Tax Planning Solutions LLC serves clients throughout Florida, Washington, D.C., and the United States. Attorney Ghani provides legal guidance on business and tax matters. Contact her today to discuss your transaction and the contractual protections you may need.