Business Purchase Agreement: Key Terms Explained

What Is a Business Purchase Agreement?

A Business Purchase Agreement (BPA) — also called an Asset Purchase Agreement (APA) for asset sales — is the legally binding contract that governs the sale of a business. It's the most important document in the transaction, specifying exactly what's being sold, for how much, under what conditions, and what protections each party has.

Never sign a purchase agreement without having it reviewed by a business attorney experienced in mergers and acquisitions. The $3,000-$7,000 in legal fees is a small price to pay for protection on a six-figure or seven-figure transaction.

Key Terms and Clauses

Purchase Price and Payment Terms: The total price, down payment amount, seller financing terms, and earnout provisions (if any). This section should also specify how the purchase price is allocated among asset categories (equipment, inventory, goodwill) — this allocation has significant tax implications.

Assets Included and Excluded: A detailed list of exactly what transfers to the buyer. Common inclusions: equipment, inventory, intellectual property, customer lists, business name, phone numbers, website, and social media accounts. Common exclusions: cash, accounts receivable, personal items.

Representations and Warranties: Statements of fact that each party makes about themselves and the transaction. The seller typically warrants that: financial statements are accurate, there are no undisclosed liabilities, equipment is in working order, the business is in legal compliance, and there are no pending lawsuits.

Indemnification: Specifies what happens if a representation or warranty turns out to be false. Typically, the party who made the false representation must compensate the other for any resulting losses.

Non-Compete and Non-Solicitation: Prevents the seller from competing with the business or soliciting its customers and employees for a specified period.

Contingencies: Conditions that must be satisfied before closing. Common contingencies include: satisfactory due diligence, financing approval, lease assignment, and landlord consent.

Protecting Yourself as a Buyer

Key protective clauses for buyers:

• Due diligence contingency: Allows you to walk away (with your deposit returned) if due diligence reveals material problems
• Financing contingency: Protects you if your loan isn't approved
• Escrow holdback: A portion of the purchase price (typically 5-10%) held in escrow for 6-12 months to cover undisclosed liabilities
• Basket and cap on indemnification: Sets minimum and maximum amounts for indemnification claims
• Survival period: How long representations and warranties remain enforceable after closing (typically 12-24 months)
• Seller consulting agreement: Formalizes the seller's obligation to provide transition support

Protecting Yourself as a Seller

Key protective clauses for sellers:

• Earnest money deposit: Non-refundable after due diligence period, protecting against buyer walk-away
• No-shop clause: Prevents the buyer from using your deal terms to negotiate with other sellers
• Closing deadline: Sets a firm date by which the deal must close or the agreement terminates
• Limitation on indemnification: Caps your maximum liability for representation and warranty claims
• Release of personal guarantees: If you've personally guaranteed business debts, the buyer should assume or release these at closing

Disclaimer and Next Steps

This guide is for informational purposes only and does not constitute legal advice. Business transactions involve significant legal complexity. Always work with a qualified business attorney who can review your specific situation and protect your interests.

Browse businesses for sale on BuyThe.Biz, or find a business broker in our directory who can connect you with trusted legal professionals.