The Purchase Agreement When Selling a Small Business

Once you and a buyer agree on the main terms, everything ends up in one document: the purchase agreement. It's long and it's legal, but most of it answers a few plain questions. Knowing them ahead of time helps you prepare, ask better questions and avoid surprises after closing.

Where it fits in a sale

Most private sales follow a similar path: you agree on the outline in a letter of intent, the buyer does due diligence, and then both lawyers work out the purchase agreement, which you sign before or on closing day. Unlike most of an LOI, the purchase agreement is binding.

What it usually covers

1. What is being sold. In an asset sale, a list of the equipment, inventory, contracts, name, phone numbers and other assets included, and anything left out. In a share sale, the shares of the company. Our guide to asset sales and share sales explains the difference.
2. The price and how it's paid. The amount due at closing, any vendor take-back or earn-out, and how the price is split between assets, which matters for tax.
3. Adjustments. How rent, prepaid expenses, deposits, inventory and similar items are settled at closing.
4. Representations and warranties. The statements you make about the business. BDC calls this the core of the agreement, because it's where risk gets divided.
5. Indemnities and holdbacks. What happens if one of those statements proves untrue, how long you remain responsible, any limit on the amount, and whether part of the price is held back to cover claims.
6. Conditions. Things that must happen before closing, such as the buyer's financing, the landlord's consent to assign the lease, or transfer of licences.
7. Your promises after the sale. Training and handover, and any non-compete or non-solicit terms.
8. Staff. Which employees the buyer offers to keep and who is responsible for what they're owed up to closing. See what to tell employees.
9. Closing. The date, the documents each side signs and hands over, and how the money is paid.

Representations and warranties, in plain terms

The buyer will ask you to confirm things like: the financial statements are accurate, taxes are filed and paid, you own the assets free of loans except those disclosed, there are no lawsuits or known problems other than those listed, and key contracts are in good standing. As BDC notes, few businesses can say all of that with no exceptions, so the usual approach is to list known issues in a schedule attached to the agreement.

Being open here protects you. A problem you disclosed is something the buyer agreed to accept. A problem you didn't mention may become a claim against you later.

Points worth discussing with your lawyer

• How long your representations last after closing.
• A limit on the total you could owe, and a minimum below which small claims aren't made.
• Holdback terms: the amount, who holds it, and when it's released.
• Knowledge qualifiers, such as "to the seller's knowledge," where you can't be certain.
• What happens if a condition isn't met by a set date, and whether any deposit is returned.
• Price allocation between assets, which your accountant should review, along with GST/HST and PST and income tax.

How to prepare

1. Gather your records early. Our list of documents needed to sell a business covers most of what the schedules will ask for.
2. Write down anything a buyer should know: disputes, repairs, unusual contracts, staff matters.
3. Keep the terms you agreed in the LOI next to you when you read the draft, and flag anything that has changed.
4. Ask your lawyer to explain each section in plain language before you sign.
5. Leave enough time. Lawyers going back and forth on drafts often takes a few weeks.

A note on advice

This guide is general information, not legal, tax or financial advice. The purchase agreement decides what you're paid and what you remain responsible for after the sale, so please have your own lawyer and accountant review it before you sign.