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A Purchase Agreement, also known as a Sales Agreement, is a contract where a seller promises to sell something, and a buyer promises to purchase it. In the context of small and medium-sized businesses (SMBs), it plays a crucial role in business transactions such as mergers and acquisitions. This agreement outlines the terms and conditions by which a sale is to be made.
A Purchase Agreement for an SMB typically covers:
Purchase Agreement vs. Letter of Intent
A Purchase Agreement and a Letter of Intent (LOI) both form part of the sale process of SMBs, but they have distinct roles. An LOI is usually the first step in a business sale transaction. It signifies the buyer's initial interest and outlines the fundamental terms of the sale, though it's non-binding. On the contrary, a Purchase Agreement is a binding contract which legally finalizes the details of the sale.
How to Calculate the Value Included in a Purchase Agreement:
To determine the "value" within a Purchase Agreement, the key element to look at is the purchase price. This gets decided during business valuation. The process involves:
Why is a Purchase Agreement Important?
The Purchase Agreement plays a vital role in SMB transactions because it:
In layman's terms, a Purchase Agreement is the final, legally binding 'handshake' between a buyer and a seller in a business transaction. It specifies who's buying, what they're buying, when and how they're paying, and what happens if things don't go as planned. It serves as the blueprint of a sale deal, protecting both parties, and reducing uncertainties associated with the transaction.