Selling or Buying a Small Business: What the Purchase Agreement Should Cover

Buying or selling a business is more complex than most contracts. The purchase agreement spells out what is sold, the price, promises each side makes and what happens after closing.

Asset sale or stock sale

In an asset sale the buyer picks specific assets and liabilities. In a stock or ownership interest sale the buyer takes the whole company, including hidden liabilities. Tax and liability outcomes differ, so get professional advice.

Key terms

• The price and how it is paid, including any holdback or seller financing.
• What assets, contracts, inventory and intellectual property are included.
• Representations and warranties about finances and legal compliance.
• Indemnification if promises prove false.
• Non-compete and transition support from the seller.
• Closing conditions and date.

Due diligence

• Financial statements and tax returns.
• Contracts, leases and licenses.
• Employee and liability matters.
• Lawsuits, liens and permits.

Protect yourself

1. Hire an attorney and an accountant.
2. Sign a confidentiality agreement before sharing records.
3. Get lender and landlord consents if needed.
4. Plan the handover of customers and staff.

Preparing the business for sale

Before listing, organize financial statements, tax returns, contracts, leases, licenses and employee information. Buyers will review all of it during due diligence, and gaps or surprises can lower the price or kill the deal. Consider cleaning up records, resolving open disputes and documenting key processes. Many sellers use a broker or advisor to prepare a valuation and market the business confidentially.

Valuation and price structure

• Multiples of earnings, revenue or cash flow, depending on industry.
• Asset-based valuation for businesses with significant equipment or inventory.
• Earn-outs, where part of the price depends on future performance.
• Seller financing, where the seller accepts installment payments.
• Holdbacks or escrows to cover claims after closing.
• Working capital adjustments at closing.

Key protective terms for each side

1. Representations and warranties about finances, taxes, contracts and legal compliance.
2. Indemnification limits and survival periods.
3. Non-compete and non-solicit covenants from the seller.
4. Transition services and training.
5. Treatment of employees and benefits.
6. Assignment of leases and key contracts, with required consents.

Taxes and allocation

In an asset sale, the purchase price is allocated among asset classes such as equipment, inventory and goodwill, which can affect each party's taxes. Sales and transfer taxes may apply. Get advice from a tax professional early, because structure choices can change the result significantly.

Closing and after

• Sign the purchase agreement and closing documents.
• Transfer licenses, permits, accounts and domain names.
• Notify customers, vendors and employees.
• File final tax returns for the seller and transition payroll.
• See our guides to letters of intent and partnership dissolution.

Terms to know

• Asset purchase: buying selected assets and liabilities.
• Stock or equity purchase: buying ownership interests.
• Earn-out: payments based on future performance.
• Escrow: money held to cover claims.
• Working capital: current assets minus current liabilities.
• Representations and warranties: statements of fact that the seller stands behind.

Checklist for sellers

1. Organize three to five years of financials.
2. Resolve disputes and clean up contracts.
3. Sign a confidentiality agreement with buyers.
4. Compare asset and equity sale tax outcomes.
5. Negotiate indemnity limits.
6. Plan the transition and employee communication.

Frequently asked questions