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What's in a Contract of Purchase and Sale?


by Jeffrey S. Lowe

A typical contract of purchase and sale for a business covers

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Basic Structure of the Sale

The contract should clearly describe who is buying what from whom at what price and when. It explains whether the sale is of assets or of shares. The assets or the types of shares to be purchased are described in detail.

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Allocation of the Purchase Price

In an asset purchase, the purchase price is usually divided among the assets, lands, buildings, leasehold and machinery, inventories and receivables, intangible property and important contracts, and goodwill. These valuations are important as they have tax consequences.

In a share purchase, the purchase price is usually for the shares of the company. Sometimes, a refundable deposit is paid at the signing of the option, the majority of the price is paid on the completion date, and a holdback amount is paid at a time after the completion date. The holdback is a portion of the price which is "held back" by the buyer from the seller to make sure that the seller has done all that he promised to do.

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Representations and Warranties

Representations and warranties are the promises and obligations of each party in the sale of the business. The buyer promises to do certain things and the seller promises to do certain things. These promises will be specific to each individual sale. Some examples of common promises by the seller are:

         (a) He owns the assets or shares to be sold and has the right to sell

         (b) He will carry on the normal activities of the business and will not
              do anything to harm the business until the closing.

         (c) He will make all the company resolutions necessary for the sale.

         (d) He will co-operate and provide reasonable help to the buyer for the
              buyer to receive the required consents from third parties (i.e.
              government, landlord, franchisor etc.)

         (e) He guarantees the truth of all the information that he has told the
              buyer about the business (i.e. financial statements, there is no
              claim on the machinery, there is no outstanding lawsuit etc.).

         (f) He agrees to indemnify the buyer against any problems that might
             arise from untrue information or any assets which are claimed by
             others. This means that the seller will pay the costs resulting from
             any broken promises or problems with the business which he
             knew about but did not tell the buyer.

Some common promises made by the buyer are:

         (a) She will pay the purchase price.

         (b) She will pay the taxes due.

         (c) She will assume the debts and liabilities of the business which
              she has agreed to accept.

         (d) She has the right and ability to buy the business.

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Termination of employees

The buyer may want the seller to terminate all employees of the business before closing. This protects the buyer from any claims that the employees might have against the seller (i.e. unpaid overtime etc.) in the past. If the buyer wants to keep the employees, the seller should agree to help the buyer in getting the employees to start new employment with the buyer after she buys the business.

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Conditions Precedent

An important part of any contract of purchase and sale are the conditions precedent, or the "subject to" clauses. Conditions precedent are things that must happen before the buyer or seller has to complete the sale. These conditions are unique to each sale.

Common conditions precedent are the buyer obtaining a bank loan, the buyer being satisfied with a final inspection of the business, the satisfactory completion of searches and search results, or the landlord consenting to an assignment of the lease. Conditions precedent allow the parties to cancel the sale without penalty if something important happens or does not happen.

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There are tax consequences of any sale of a business. If the seller is not resident in Canada, the buyer may have to withhold some of the purchase price to pay taxes. The buyer should ask the seller to provide a guarantee as to his Canadian citizenship. In an asset sale, taxes must be paid. In certain instances, a share sale may trigger a capital gains exemption.

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Schedules list additional information regarding the sale. They are usually attached to the contract of purchase and sale, and form part of the contract. They may include a list of the inventory, any material contracts, the financial statements, and other relevant information.

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More questions?

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This page last updated: September 22, 1999
© copyright 1999 Lawyers-BC.Com Services Ltd.