In the sixth and final chapter of How to Buy a Digital Business, we look at the much-anticipated purchase agreement and business sale closing. You'll gain an understanding of what to expect in the final step of the business purchase process as well as the seller's obligations. If you want a more professional looking and complete e-book, you can download the PDF.
6. Business Purchase Agreement & Closing
Depending on the complexity and size of the transaction, a purchase agreement template can be very simple or very complex. While a simple transfer of a digital asset may only require a bill of sale, the acquisition of an income-producing business is typically accompanied by an Asset Purchase Agreement (APA) or Stock Purchase Agreement (SPA).
Most acquisitions are asset purchases, meaning that the buyer transfers the tangible and intangible items owned by the company from the seller’s corporate entity into a different corporate entity owned by the buyer. These items generally include everything from the website, customers, and inventory to trademarks, patents, and goodwill.
By contrast, in a stock purchase, the buyer acquires the seller’s business entity itself, which includes all of the assets and liabilities contained within. In either case, you will want to work with an M&A attorney and CPA to help you decide which route is best for your situation based on the legal, financial, and tax implications of your purchase. Since most owner-operated web-based business transactions are asset purchases, we will focus on things to consider when drafting your APA.
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Asset Purchase Agreement (APA)
The APA is generally a far more robust document than a Letter of Intent, often 20-40 pages, addressing many of the same items as the LOI but in greater detail. The key elements of an APA include a complete list of the assets being purchased (and not being purchased), liabilities assumed, the purchase price and how it will be paid and allocated for tax purposes, details on the closing and post-closing adjustments, seller and buyer representations and warranties, and the handling of disagreements post-transaction.
There are typically schedules attached to the APA, including financials, organizational documents, contracts, permits and other key items upon which the purchase decision was based. Lastly, there are often separate agreements simultaneously signed at closing that handle elements of the transaction that fall outside of the APA, such as non-compete or consulting agreements. A few things to consider when working with your attorney to draft an APA:
- Be specific when identifying included assets – detail domains, content, subscriptions, plugins, contracts, inventory and all other components of the business
- Confirm that the seller owns the assets you are buying and that they are transferable to the new corporate entity.
- Think through how you can retain some leverage with the seller post-transaction. A seller note or escrowed funds will leave you in a stronger position if, for example, the seller does not deliver on training or other promises.
- Consider language where you have recourse if the seller does not deliver on promises (e.g. the seller note is reduced accordingly).
- Optimize the asset allocation and explore creative ways to minimize taxes on the deal – with different depreciation schedules, some asset categories are more tax friendly for the buyer than others (e.g. “Personal Goodwill”)
- Small deals do not need big contracts – speak up if you feel the template your attorney is working from is overkill.
Takeaways: How to Close on a Business Purchase
- Have I carefully read the Asset Purchase Agreement draft?
- Have I confirmed asset ownership by the seller?
- What am I asking of the seller post-transaction?
- Does the agreement fit the deal being signed or do I want something simpler or more complex?
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We hope you took away a few insights that will help you successfully complete a business purchase transaction. Email us with any comments, suggestions, or insights of your own.