What is a Sale of Business Contract?

A sale of business contract is the binding agreement between a business seller and a buyer that will legally transfer a business from one owner to the next. It’s sometimes also referred to as a sale and purchase contract, sale or business agreement, or contract of sale.

When do you need a sale of business contract?

You’ll need a sale of business contract when you’ve agreed in principle on the sale and you’re ready to formally transfer the business. As one of the final steps in the process, this is where business buyers and sellers dot the i’s and cross the t’s to ensure a smooth business handover.

What’s included in a sale of business contract?

In short, your agreement needs to clearly state what is being transferred and for how much. It will also detail all the legal information needed to finalise the sale.

A sale of business contract needs to include:

• Which assets and liabilities are part of the sale – physical assets, property, leases, and intellectual property, as well as staff and existing financial arrangements
• Key financial/sale information – price, date of transaction and obligations the buyer and seller need to adhere to
• Any other conditions of the sale – restraint of trade clauses, transferring licences or legal permission to run the business, any ongoing seller involvement

If you drew up a term sheet or HOA, your contract will include some of the same information, but each condition will be described in more detail. Any key documents, like an asset list or lease details that are mentioned in the contract should be attached and a copy provided to both the seller and buyer to review.

Who should prepare a sale of business contract?

A business or commercial lawyer will need to draw up the contract.

Regardless of whether the buyer’s or seller’s lawyer writes the contract, you’ll both need your own legal representation. Having a team of business professionals, like a lawyer and accountant is crucial in a business sale, so if you haven’t already, call them now.

Your lawyer will help answer questions, make changes and analyse the agreement, but once you sign a contract, you’re locked in so it’s important to understand what’s included. This means personally reading through the documents and reviewing each of the terms meticulously.

When both buyer and seller have checked the contract and any amendments have been negotiated, it’s time to make it official. Both parties will need to sign the agreement to make it binding and an exchange will take place where you’ll sign each other’s copy of the contract.

Remember…

Buying and selling businesses is complex and so are the contracts that go with them. So don’t think of this contract stage as simply putting pen to paper. Make sure you have a solid understanding of what you’re signing and carefully examine every detail.

That way when you’re finally ready to sign, you can do it with confidence.

Wondering what else you should consider when selling? Check out our ultimate guide on how to sell a business.