List of Essential Components for a Business Acquisition Contract
Selling assets to a foreign entity can be a strategic move for US companies, opening up new revenue streams, unlocking value from underutilized assets, and enabling strategic realignments. In such transactions, a well-drafted purchase and sale agreement is essential to ensure a smooth transfer of ownership.
Common clauses in purchase and sale agreements for LLCs, corporations, partnerships, or sole proprietorships in the United States typically include the following key provisions:
- Parties Involved: The agreement clearly identifies the buyer and seller with their full legal names to clarify who is bound by the agreement.
- Description of Assets or Interests: A clear description of the business, shares, membership interests, or assets being transferred is provided.
- Purchase Price and Payment Terms: The amount to be paid, payment method, schedule, adjustments, and any deposits or option considerations are specified.
- Conditions Precedent: Conditions that must be fulfilled before closing, such as obtaining authorizations, approvals, and completion of due diligence, are outlined.
- Representations and Warranties: The seller makes assertions about the company’s corporate status, compliance with laws, ownership rights, financial statements, and absence of undisclosed liabilities or litigation.
- Assumption of Liabilities: The agreement defines which liabilities, debts, or obligations the buyer will assume, and often states that no liabilities other than those listed are assumed.
- Covenants: Agreements on actions parties will or will not take before and after closing, such as operating the business in the ordinary course, preserving relationships, or filing tax returns, are included.
- Restrictive Covenants: The seller makes promises post-closing, typically including non-compete, non-solicitation of employees or customers, and confidentiality obligations.
- Closing Date and Deliverables: The date the sale is finalized and what documents, certificates, or approvals must be delivered are specified.
- Termination Rights: The conditions under which the agreement may be terminated and the consequences of termination are outlined.
- Confidentiality: Protection of sensitive information disclosed during the transaction from unauthorized use or disclosure is ensured.
- Indemnification and Liability: Responsibility for losses or breaches of warranties is allocated, protecting parties against unknown risks.
- Dispute Resolution: Mechanisms such as arbitration or mediation to resolve conflicts arising from the agreement efficiently are included.
- Governing Law: The state’s laws governing the agreement are specified, as enforceability and interpretation vary by jurisdiction.
- Force Majeure: The agreement addresses unexpected events beyond parties’ control that may delay or prevent performance.
Additional clauses may be included depending on the business type and transaction complexity, such as authority to assign rights, corporate approvals, or detailed schedules of assets and liabilities.
An Offset clause allows the buyer to reduce the purchase price or the promissory note by deducting certain amounts such as undisclosed taxes, other debts, or failing equipment. Appendices to purchase and sale agreements may include a schedule of inventory, a schedule of all indebtedness and liabilities, and a business sale price payment schedule.
Purchasing assets instead of stock in a business is common to avoid assuming liabilities incurred before the sale. Acquiring an existing US company is advantageous for many foreign and domestic businesses, and tax considerations play a significant role in M&A transactions, including capital gains tax and corporate income tax.
These clauses ensure clarity of terms, manage risks, allocate liabilities, preserve business value, and facilitate smooth transfer of ownership in LLC, corporate, partnership, or sole proprietorship sales in the US.
In the context of purchasing a business, understanding key provisions such as the description of assets, purchasing price, and conditions precedent are crucial. Moreover, investors need to be aware of additional clauses like the Offset clause, which allows reducing the purchase price based on factors like undisclosed taxes or debts. Such meticulous clauses aim to maintain business value and facilitate smoother transactions, whether in LLCs, corporations, partnerships, or sole proprietorships. These clauses also help manage risks, allocate liabilities, and ensure clarity of terms in US-based sales involving finance and investing.
