Having a well-drafted contract is a crucial part of the business sale process.

In this blog, we outline the essential elements you should include in a sale agreement to safeguard your rights and minimise potential risks.

What is a business sale contract?

A business sale agreement is the main legally binding document required to sell a business. The business seller usually prepares the contract for sale, which sets out terms relating to the aspects of a sale, such as what assets are included, the sale price, and dispute resolution processes.

What should I include in a sale of business contract?

It is important to ensure that the buyer and seller have all their negotiated rights, interests and obligations represented In the sale of business contract. The contract should also set out clear steps to resolve all types of potential disputes. This reduces the likelihood of messy litigation down the line.

Elements of a business sale contract that shouldn’t be missed include:

1. Parties

Including the names and/or company names and details of the seller and buyer.

2. Sale price

Parties often negotiate the value of different assets, and engaging a valuation expert can be a huge help to settling on a sale price. The final, agreed purchase price will be based on the business assets, which usually fall into two categories:

Physical assets

Tangible assets, including equipment, stock, vehicles, machinery and real property.

Goodwill

Intangible assets, including location, the business’s reputation, customer list and brand identity.

3. List of assets

Once values have been negotiated, a list of all essential business assets should be included in the business sale contract. Some of the most common assets included in a business sale contract include:

1. Customer and supplier contracts;
2. Equipment;
3. Inventory;
4. Websites;
5. Various business technologies;
6. Real estate;
7. Business name/s;
8. Business records;
9. Intellectual property (IP);
10. Staff.

4. Warranties and representations

Warranties and representations in a business sale contract are designed to protect both parties from each other’s conduct, particularly relating to the accuracy of things like financial records and the legal business structure.

5. Business protection

Confidentiality, non-compete, and guarantee clauses help to prevent a seller from disclosing sensitive information to third parties, starting a competing business, and making false claims and representations without legal consequences.

Tips on writing a contract for sale

Clarity and precision are key when writing a business sale contract. The assistance of legal professionals to draft and review the contract will ensure that the buyer and seller’s interests are protected.

Following are tips for writing an effective contract for sale:

1. Be specific: Clearly define all specific terms to avoid any misunderstandings, including the payment details, the business being sold, and any pre-requisites for the sale to proceed;
2. Outline responsibilities: Include any obligations or responsibilities that both seller and buyer must fulfil before and after the sale;
3. Address liabilities: Include provisions addressing any potential liabilities or claims related to the business. This protects the buyer from unforeseen issues that may arise after the sale;
4. Use clear language: Write in straightforward language that both parties can easily understand. Avoid legalise and overly complex terms;
5. Consider including contingencies that allow for changes in circumstances, such as inspections and financing approval.
6. Review and revise: Before finalising the contract, review it several times with all parties. Make any revisions necessary to ensure that both parties agree with the terms.
7. Sign and date: Ensure that both parties sign and date the contract and keep copies for your records.

Common mistakes in business sale contracts

Some common mistakes to avoid are:

1. Failing to define the scope of the sale clearly

The contract should clearly specify what is being sold, including all assets, liabilities, and intellectual property. Ambiguity in this area can lead to later disputes.

2. Neglecting to include key terms and conditions

The contract should cover all essential elements, such as the purchase price, payment terms, indemnification, warranties and representations. Leaving out any of these can create uncertainty and disputes.

3. Using unclear or ambiguous language

Using vague or confusing language in the contract can lead to misunderstandings and disputes. It’s important to use clear terms that both parties can easily understand.

4. Not obtaining necessary approvals or consents

Depending on the parties involved and the nature of the business, the sale may require consents or approvals, such as from regulatory bodies, lenders and shareholders. Failing to obtain these approvals can delay or even derail the sale.

5. Neglecting to address potential liabilities or claims

The contract should include provisions addressing any potential liabilities or claims related to the business, such as legal disputes, outstanding debts or environmental issues. Failing to address these potential risks can leave the buyer vulnerable to unexpected costs or liabilities after the sale.

A well-structured business sale contract is essential to facilitate a smooth transaction. By avoiding these common mistakes and working with legal professionals, you can create an effective and comprehensive business sale contract.

Here to Help

If you’re buying or selling a small business, contact us to learn more about how we can assist you with drafting or reviewing a comprehensive agreement to purchase a business.