Understanding Standard Contingencies in a Business Purchase

When it comes to buying a business, there are various factors to consider and steps to
take to ensure a smooth and successful transaction. One crucial aspect of any business
purchase agreement is the inclusion of contingencies. Contingencies are conditions that
must be met for the sale to proceed as planned. These contingencies help protect both
the buyer and the seller and ensure that the transaction is equitable and beneficial to all
parties involved.

Here are some standard contingencies that are typically included in a business
purchase agreement:

1. Due Diligence Contingencies:

One of the crucial contingencies is the due diligence process. This allows the buyer to
investigate the business thoroughly before finalizing the purchase. Due diligence or
Books and Records examination, may involve reviewing financials, contracts, employee
agreements, assets, liabilities, and any other pertinent information about the business. If
the buyer uncovers any issues during the due diligence period that were not disclosed
by the seller, they may have the right to cancel the sale.

2. Financial Contingencies:

Many Business Acquisitions are funded by financing from a lender. One of the most
common contingencies in a business purchase agreement is related to the financing.
This contingency ensures that the buyer has the necessary funding in place to complete
the purchase. It may include obtaining a loan or securing other forms of financing. The
agreement typically specifies a deadline by which the buyer must secure conditional
approval, and if this condition is not met, the transaction may be canceled. Unlike many
types of financing for purchases like a home or a car, most business acquisition
financing transactions require that the business you want to buy must also qualify for
the financing needed to complete the purchase.

3. Regulatory Contingencies:

Depending on the industry and location of the business, there may be specific
regulatory requirements that must be met for the sale to proceed, which may include
proper licensing or inspection. These contingencies ensure that the buyer is aware of
and can comply with all relevant laws, regulations, and obtain any licenses necessary to
operate the business such as Health Department, Liquor Licenses, and Contractor’s
Licenses just to name a few. Failure to meet regulatory requirements or to obtain
necessary licenses could lead to the cancellation of the sale.

4. Lease Contingencies:

If the business operates out of a leased space, there may be lease contingencies
included in the Purchase Agreement. These contingencies ensure that the buyer can
either assume the existing lease or negotiate a new lease agreement with the landlord.
Issues such as lease terms, renewal options, and landlord approvals may be addressed
in this contingency.

5. Employee Contingencies:

In cases where the business has key employees, there may be contingencies related to
the transfer of employees to the new owner. This may include agreements with key
employees on their roles, responsibilities, compensation, and benefits post-sale. It is
essential to address these contingencies to ensure a smooth transition for both the key
employees and the new owner.

In conclusion, including standard contingencies in a business Purchase Agreement is
crucial for protecting the interests of both the buyer and the seller. These contingencies
help ensure that the transaction proceeds smoothly and that all parties are aware of
their rights and responsibilities. By understanding and addressing these contingencies
in advance, buyers and sellers can minimize risks and increase the likelihood of a
successful business acquisition.

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