The business purchase agreement, the first draft of which is traditionally drafted by the buyer’s solicitors, documents the terms agreed between the parties.
The main provisions in the agreement include the following:
Assets & Liabilities Being Transferred
A key part of the agreement is to identify clearly which assets and liabilities are to transfer to the buyer as part of the sale of the business.
A seller will want to ensure that any assets that are not included in the sale are expressly excluded (for example assets it shares with the rest of its group) and a buyer will want to ensure that only the liabilities it has agreed to take on (if any) are included.
Transfer of Assets
Whilst the transfer of ownership of some assets may be possible by simple physical delivery, other assets, such as freehold property, goodwill and intellectual property, will require separate documents to be entered into between the buyer and the seller in order to effect the transfer.
The same is the case for contracts, where additional documentation will be required in order to transfer the contracts to the buyer.
The business purchase agreement will set out the requirements in this regard to ensure that the assets are effectively transferred.
The agreement will specify the nature and timing of the consideration the buyer will receive for the business. This may be by reference to completion accounts, which allow for adjustments to be made to a purchase price based on older statutory or management accounts.
A key point for the seller to consider is the allocation of the purchase price to the different assets, as this will have tax implications.
For further information on consideration in an asset sale, see A Seller's Guide to Structuring the Transaction.
In order to protect the goodwill of the business, the buyer is likely to seek to restrict the activities of the seller after completion.
The aim will be to prevent the seller from competing with the business, soliciting customers, suppliers and employees of the business and from disclosing confidential information. In certain circumstances the buyer may wish to tie in the individual shareholders to the restrictive covenants to protect the business.
Care should be taken by the seller that the restrictive covenants do not conflict with the seller's intentions following completion of the transaction.
Warranties & Indemnities
A seller may be required by the buyer to provide warranties in relation to the target business.
These are statements regarding the status of the business and the assets that the buyer will seek to rely on as a means to adjust the purchase price post-completion, by way of a warranty claim, should the statements prove to be untrue.
Although warranties may be more limited in an asset sale if liabilities are not transferring to the buyer, the buyer will still be concerned with the status of the assets being transferred and so seek warranties in this regard.
However, warranties can be qualified by the seller, either through careful drafting of the warranties themselves or through the disclosure exercise.
Limitation of Liability
Having provided warranties in favour of the buyer, the seller will wish to limit its potential liability under those warranties and this is usually acceptable to the buyer.
The scope of such limitations will be dependent upon the bargaining position of the parties but it is common to see at least a limit in terms of the nature and scope of the liability, as well as the time within which a warranty claim can be brought against the seller.
Unless specifically excluded, employees that are wholly or substantially engaged by the target business will, by virtue of the Transfer of Undertakings (Protection of Employees) Regulations 2006 ("TUPE"), transfer automatically to the buyer upon completion.
This means that the buyer becomes their new employer on the same terms and conditions as their existing employment contract. The seller is obliged to consult with its employees within a "reasonable" period prior to completion.
Consequently, it is usual to have certain provisions in the business purchase agreement to ensure that each party complies with its obligations under TUPE ie the seller is responsible for all employment liabilities and issues before completion and the buyer thereafter, unless the parties have agreed, for instance, for the buyer to retain the services of any identified employees.
This will also include dealing with the liability for any redundancies as a result of the transaction. Despite what is prescribed by the TUPE regulations, the liability of the buyer under TUPE can be reduced significantly through the negotiation of warranties and indemnities provided by the seller.
In some cases, a delay may be required between exchange and completion of the business purchase agreement in order to allow certain things to happen.
For example, shareholder approval may be required on the part of the buyer, or security over certain assets may need to be released, before the transaction can be completed.