Since you can use sale and purchase agreements in a range of different commercial contexts, you must understand their application to your business model. A sale and purchase agreement is a legally binding agreement obligating a transaction between a buyer and a seller. Sale and purchase agreements are typically used in real estate transactions. However, these agreements are also useful:
- when your business contracts a supplier for the continued supply of goods; or
- you are selling your business or acquiring an existing business.
To help you decide whether a sale and purchase agreement would benefit your business, you should consider asking a lawyer the following questions.
What Are the Benefits of Signing the Agreement?
First, you should ask yourself: ‘what is the utility of entering into a sale and purchase agreement?’ Sale and purchase agreements can provide a degree of certainty for both parties to the transaction. That is to say:
- the seller is assured that someone will buy their goods or real estate; and
- the buyer is guaranteed the supply of goods or ownership of property.
In addition, if the other party changes their mind or breaches the agreement, you may have contractual remedies available. These can help you compensate your loss.
Of course, there are other benefits to a sale and purchase agreement, including:
- certainty as to the purchase price of the goods or property; and
- clarification as to what items you will include or exclude in the sale.
What Are ‘Conditions Precedent’?
In almost every sale and purchase contract, there will be specified events that must occur before completing the sale. These events specified in your sale and purchase agreement are called ‘conditions precedent.’ Some common conditions precedent include:
- the buyer receiving finance approval if they are borrowing money to pay the purchase price under the agreement;
- a landlord consenting to the buyer becoming a new tenant on their property;
- a franchisor consenting to the buyer becoming a franchisee; and
- either party consents to the transfer of necessary contracts, licences or permits.
Whilst the completion of any conditions precedent often takes more time than parties initially anticipated, it helps parties plan what they need to do. A lawyer can clarify the conditions precedent in your sale and purchase agreement and identify any additional conditions that you should include.
In any event, a lawyer can outline what steps you need to take to affect the sale in your specific context.
When you are ready to sell your business and begin the next chapter, it is important to understand the moving parts that will impact a successful sale.
This How to Sell Your Business Guide covers all the essential topics you need to know about selling your business.
What Are Some Steps Involved in the Sale?
There are certain steps you must take to execute a sale and purchase agreement, particularly if you are purchasing another business. For this reason, you must clarify with your lawyer the steps you must take to ensure that the sales agreement goes as planned. Below is a summary of the steps involved in purchasing a business.
1. Due Diligence
In some instances, a purchaser of your business might request to see your financial records, any relevant business contracts, and other important business records. This stage is known as due diligence. Sale and purchase agreements often include a ‘due diligence period’, which allows the purchaser to review your business’ materials after signing the agreement. If they uncover some unfavourable aspect of your business, they may be able to end the agreement and withdraw from the sale during this period.
2. Sign and Exchange
After finalising negotiations, both you and the purchaser will sign and exchange the sales contract. Typically, the purchaser will pay you a deposit upon signing the agreement. However, in the event that the purchaser decides to withdraw from the purchase for no good reason, they may need to forfeit this deposit to you.
3. Settlement
At this stage of the sale, you will transfer business and its assets to the purchaser, and the purchaser will pay the full purchase price. Therefore, there is often a period between signing the agreement and completion. However, the length of time ultimately depends on your specific context, such as the conditions precedent.
4. Post-Completion
In some instances, you may have further obligations after formally transferring your business. Whilst these obligations are particular to your commercial context, they could include training the purchaser of your business or introducing the purchaser to pre-existing suppliers. In any event, a lawyer can identify if you are under further contractual obligations post-completion of the sale.
Key Takeaways
A sale and purchase agreement is a legally binding agreement that governs a transaction between a buyer and a seller. Before you sign a sale and purchase agreement, it would be best to ask a lawyer:
- how will your business benefit from signing the sale and purchase agreement;
- what are the conditions precedent in your agreement; and
- what are the steps involved to complete the sale.
If you need help with reviewing a sale and purchase agreement, our experienced business purchase lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
In the pre-contract stage of a sale and purchase agreement, a heads of sale agreement provides a brief outline of the main commercial terms of the sale of a business. However, since they are typically non-binding, you will eventually need to sign a formal business sale agreement.
Whilst businesses can use standard sale and purchase agreement templates, it would be wise to retain a lawyer to draft the agreement. This way, your written agreement can adequately reflect what you and the purchasing party have negotiated.
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