Breaking Down Business Acquisition Purchase Agreements

When dealing with a business acquisition, the Purchase Agreement is the governing contract used to transfer ownership of the business from the seller to the buyer. Depending on the transaction, the Purchase Agreement may be referred to as a Business Transfer Agreement, Stock Purchase/Redemption Agreement, Asset Purchase Agreement, Agreement of Sale, etc. (herein the “Purchase Agreement”). In all business acquisitions, lenders or their counsel must carefully analyze the terms of the Purchase Agreement to catch any potential issues and to confirm adequacy of the terms.

Obtaining the Purchase Agreement

Lenders should obtain a proposed Purchase Agreement as soon as it is available. If the terms are being negotiated, lenders can review the working draft to confirm that the terms are acceptable, understanding they are not binding until the Purchase Agreement is fully executed. If the Purchase Agreement is fully executed, but the terms are unacceptable to the Lender, the parties can execute an amendment to clear any potential issues may violate the Standard Operating Procedures (“SOP”) or otherwise prime the Lender’s interests.

In many instances, buyers and sellers prefer that the Purchase Agreement and associated documents are signed at closing. While many Lenders choose to accept this practice, it is imperative that they obtain a final draft version for review prior to closing (even if the document lacks signatures). After signing, but before funding, the lender should review the executed version and compare it to the final draft that was previously reviewed and accepted.

Reviewing the Purchase Agreement

Buyer & Seller Names: Lenders must confirm that the correct names are shown on the Purchase Agreement. In many instances, the names may be incorrect or the buyer might not be the borrower under the loan. This is common when the transaction begins with the understanding that a borrowing entity will be formed prior to closing. If the Purchase Agreement is not with the borrower, the contract must be amended or assigned to the entity receiving loan proceeds to accommodate the sale.

Purchase Price & Allocation: The price and allocation should match the terms agreed upon during the underwriting stage of the transaction. If there are differences, the parties must either revise the Purchase Agreement or adjust underwriting in a manner that allows for the price and allocation shown.

Injection Requirements: The new SOP includes strict injection requirements for certain SBA transactions. When reviewing the Purchase Agreement, lenders must confirm that the details of injection are included and meet the necessary requirements set forth in the SOP. For more information, see my prior article detailing minimum injection requirements.

Seller Financing: If the seller is carrying a note, the terms should be included within the Purchase Agreement. The seller note should also be reviewed separately from the Purchase Agreement to confirm that the terms are acceptable and to begin preparation of the Standby Creditor’s Agreement (SBA Form 155).

Seller’s Role Post-Closing: The SOP dictates that: “The seller may not remain as an officer, director, stockholder or key employee (an employee who manages daily operation, e.g. overseeing a department or a division, not a clerical staff person) of the business. (13 CFR 120.130). If a short transitional period is needed, the small business may contract with the seller as a consultant for period not to exceed 12 months including any extensions.” If the Purchase Agreement or any associated document states that a seller will remain in one of the capacities described above, the document must be revised or else it will likely be deemed ineligible.

Bill of Sale: When transferring a business through an asset sale, the seller should provide the buyer with a bill of sale that memorializes the transfer of assets from the seller to the buyer. While a bill of sale is customary, lenders should review the document and insist that it includes language that warrants and defends good title to the assets being transferred. Because the lender is taking a lien position on the assets, it is important for lender to insist that the protective language is included in each transaction where assets are being transferred.

The Purchase Agreement dictates the relationship between the parties and their various obligations to each other. Although all Purchase Agreements are different, the above aspects are common and should always be carefully reviewed prior to closing. For more information regarding business acquisitions or any other SBA questions, please send me an e-mail at [email protected].

Disclaimer: This article is made available for educational purposes only and is not intended as legal advice.