What is a Purchase and Sale Agreement?

The sale and purchase agreement (SPA) for your business is one of the most important legal documents you’ll ever sign. After all, many years of hard work will culminate in this single transaction. You don’t want to have difficulties collecting the money you are due or have legal problems haunting you into the future. A carefully constructed SPA can be your best insurance policy for preventing such catastrophes.

Customarily, the buyer’s lawyer provides the initial draft of the purchase agreement for a business. This makes sense, since the buyer has to live and work with the company while you will walk away into the sunset (theoretically, at least). However, we suggest that your lawyer draft the sections that are most important to you. In most cases, that means the clauses containing representations and warranties about the business. Ideally, you should try to avoid or limit the making of any warranties or guarantees for which you can be held legally accountable. You may also negotiate closely with the buyer as to which liabilities he or she is assuming, and which will remain with you.

Here’s where a good lawyer can pay dividends. Make sure that you maintain on-going liability insurance for any liabilities that will remain with you – for example, product liability insurance on products that were sold during your tenure as owner. Similarly, indemnity provisions, in which you promise that you will reimburse the buyer for certain types of expenses if they occur, are often a hotly disputed area of the SPA.

The sale and purchase agreement is likely to be a lengthy, complicated document. For some of the more elaborate deals, the contract plus any attachments can run into hundreds of pages. You should go through it carefully with your lawyer and make sure that you understand the implications of whatever is in there.

Once the vendor and acquirer have agreed on the language of the sale and purchase agreement, both parties will sign it. The contract will state the date at which the final transfer of ownership and possession of the business will occur, and exactly when the seller will get the money. With a signed purchase agreement in hand, the buyer can finalize any financing arrangements with outside lenders in anticipation of the closing.