Appendix C: Purchase Agreement Clauses

These are typical clauses in a purchase agreement:

Definitions: Any well-written purchase agreement contains definitions of the key terms used throughout the document. 

Purchase Price and Financing: This defines the amount of the purchase price and how it’s paid. The consideration is typically broken down by the following: 

  • Earnest money deposit
  • Down payment
  • Additional funds to be deposited with escrow upon conclusion of due diligence
  • Amount of seller financing
  • Third-party financing
  • Holdback amount

Exclusivity: This area details whether the parties are negotiating exclusively with one another. “No-shop” or “go-shop” clauses may be included in this section.

Inventory: This section contains a description of the inventory included in the sale and identifies who will count the inventory: the buyer, the seller, or an inventory valuation service. It also provides adjustments to the purchase price based on the difference in inventory between signing and closing, as well as a representation regarding the condition and salability of the inventory.

Working Capital: This section describes how working capital will be defined and the procedure for calculating working capital. The purchase price normally includes a set amount of working capital at closing, and then an adjustment is made three to six months after the closing if the working capital was different than the amount that was included in the purchase price.

Contingencies (Conditions): The purchase agreement contains contingencies if it’s signed before closing. Buyer contingencies can relate to obtaining financing, a license, or franchisor approval, and transferring a lease. If the seller is offering financing, the agreement may also be contingent on the seller approving the buyer’s credit and financial position.

Earnest Money Deposit: The agreement outlines who holds the earnest money deposit, whether it is refundable or non-refundable, and the conditions if the deposit is refundable.

Closing Costs and Prorations: This area of the agreement explains who will pay which closing costs. Many closing costs are split equally between the buyer and the seller, with each party paying their own advisors.

Training and Transition Period: This section outlines in detail the length and form of the training agreement in detail. Being highly specific regarding the length of the training agreement, including how many hours and on what terms, is a good practice. Not doing so can lead to post-sale disagreements, and buyers sometimes sue sellers for failure to train them properly.

Representations and Warranties: The seller’s representations are often more thorough than the buyer’s representations. Representations and warranties, called reps and warranties for short, are heavily negotiated in larger transactions and used by many buyers to flush out potential problems. Examples of the seller’s representations include:

  • All assets are in good repair.
  • All taxes will be paid at the closing.
  • Seller has the legal capacity to sign the agreement.
  • Seller has complied with all laws. 

Confidentiality: This clause is sometimes included even though a separate confidentiality agreement may have been previously signed.

Default and Remedies: This area includes conditions for canceling the agreement and penalties for defaulting.

Miscellaneous Legal Provisions Common to All Legal Agreements: This section can include attorney fees, mediation, indemnification, severability, governing law, risk of loss, and other provisions that generally apply to all legal agreements.