Buying or selling a business is a major decision that involves significant financial and legal commitments. One of the most important documents in the process is the Business Purchase Contract—a legally binding agreement that outlines the terms of the transaction and protects both parties’ interests.
Whether you’re a buyer or a seller, understanding the key clauses in your contract can make all the difference in ensuring a smooth, fair, and secure deal. In this article, we’ll break down three essential clauses every business purchase contract should include: contingencies, warranties, and indemnification.
1. Contingency Clauses: Your Safety Net Before Settlement
A contingency clause is a condition that must be satisfied before the sale becomes final. It allows the buyer (and sometimes the seller) to walk away from the deal or renegotiate terms if certain requirements aren’t met.
Why They Matter
Buying a business isn’t just about agreeing on a price. You need to verify that what you’re buying matches what’s been promised. Contingency clauses provide the time and flexibility to perform due diligence before you’re legally bound to complete the purchase.
Common Contingencies in a Business Sale
- Due Diligence Contingency: Gives the buyer time to review financial statements, contracts, leases, and employee information to confirm the business’s true position.
- Finance Contingency: Allows the buyer to back out if they’re unable to secure the necessary funding or loan approval.
- Regulatory Approval Contingency: Ensures any required licences, permits, or approvals are granted before completion.
- Lease Transfer Contingency: Particularly important for businesses that operate from leased premises. The clause ensures the landlord consents to the transfer or assignment of the lease.
Example
If a buyer discovers during due diligence that key supplier contracts will expire soon or that there are outstanding tax liabilities, the contingency clause allows them to negotiate a reduced price or withdraw from the deal without penalty.
Fulljames Law Tip
When drafting contingency clauses, clarity is crucial. Each condition should have a specific timeframe and clear requirements for satisfaction, ensuring neither party is left uncertain about their obligations.
2. Warranties: Promises About the State of the Business
A warranty is a statement of fact made by the seller about the condition of the business at the time of sale. These statements are intended to reassure the buyer and protect them if any information turns out to be false or misleading.
Why Warranties Are Important
Warranties give buyers confidence that the business they are purchasing is sound. For sellers, they demonstrate transparency and can help avoid disputes later on. Breaching a warranty can lead to compensation claims or even termination of the contract.
Common Warranties in Business Sales
- Financial Warranties: The accounts provided accurately reflect the business’s financial position, and no undisclosed debts exist.
- Legal Compliance: The business complies with all applicable laws, regulations, and industry standards.
- Employee and Contractual Warranties: All employment contracts and supplier agreements are valid and enforceable.
- Tax Warranties: All taxes have been correctly reported and paid.
- Asset Warranties: The business owns the assets being sold, and they are free of encumbrances.
Example
Suppose a seller warrants that the business has no pending legal disputes. If a buyer later discovers an unresolved claim from a former employee, they could seek compensation for breach of warranty.
Fulljames Law Tip
From a seller’s perspective, it’s wise to include disclosure statements alongside warranties. These documents allow the seller to list any known issues—such as minor disputes or upcoming lease renewals—so they aren’t later accused of providing misleading information.
From a buyer’s perspective, the buyer should undertake independent searches, review and due diligence enquiries to verify any disclosures and/or warranties provided.
3. Indemnification Clauses: Protecting Against Future Losses
An indemnification clause (often called an indemnity clause) outlines who will bear responsibility for certain losses, damages, or liabilities that arise after the sale. It is one of the most powerful protections available to both parties.
Why It Matters
While warranties deal with pre-existing conditions, indemnities provide direct compensation for losses arising from specific events or breaches. They shift risk between buyer and seller and are particularly useful when there’s a known potential liability.
Example
If the seller agrees to indemnify the buyer against any losses arising from unpaid employee entitlements that occurred before settlement, the buyer can claim reimbursement if those entitlements later need to be paid.
Key Considerations When Drafting Indemnities
- Scope: Clearly define what losses are covered (e.g. tax debts, litigation costs, employee claims).
- Timeframe: Set a time limit for when claims can be made, often aligning with limitation periods.
- Cap on Liability: Sellers may negotiate a maximum amount they’re liable for to avoid open-ended exposure.
- Procedures for Making Claims: Detail how claims must be made and the evidence required.
Fulljames Law Tip
An indemnity clause should never be copied from a template. Every business sale is unique, and the risks differ depending on the industry, structure, and size of the transaction. Tailoring indemnity clauses to reflect your specific circumstances ensures balanced protection for both parties.
How These Clauses Work Together
While each clause serves a different purpose, they all work together to create a fair and transparent agreement.
- Contingencies give buyers the right to investigate before committing.
- Warranties provide reassurance about what’s being sold.
- Indemnities protect both sides against future risks.
Without these clauses, a business purchase contract may leave parties vulnerable to financial loss, disputes, or lengthy litigation.
Additional Clauses Worth Considering
While the three clauses above are essential, other important terms often included in business purchase contracts include:
- Confidentiality clauses to protect sensitive business information.
- Non-compete clauses preventing the seller from starting a rival business immediately after the sale.
- Dispute resolution clauses setting out how disagreements will be handled (for example, mediation before litigation).
These provisions add extra layers of protection and help ensure the transaction proceeds smoothly.
Common Mistakes to Avoid
- Using a template contract without legal review
Every business sale has unique risks and obligations. A generic contract can overlook critical details or fail to comply with Queensland legislation. - Failing to define key terms
Vague wording can cause disputes later. Every clause should specify who is responsible, when obligations apply, and what happens if they aren’t met. - Ignoring disclosure obligations
Sellers should disclose any known issues early. Failure to do so can expose them to claims for breach of warranty or misrepresentation. - Skipping legal advice
Even a small oversight can have major financial consequences. Always have a qualified lawyer review your contract before signing.
FAQ
1. What is the purpose of a business purchase contract?
It sets out the terms of the sale, including what’s being bought, how much is being paid, and each party’s rights and obligations. It provides legal certainty and helps prevent misunderstandings.
2. Can I use a standard contract to buy a business?
While standard templates exist, they rarely reflect the specific risks of your transaction. Customising the contract with a lawyer ensures your interests are properly protected.
3. Who drafts the business purchase contract?
Usually, the buyer’s solicitor prepares the first draft, but both parties should have their own lawyers review and negotiate the terms.
4. What happens if a clause is breached?
Depending on the breach, the affected party may be entitled to damages, specific performance, or the right to terminate the agreement.
5. Do I need a lawyer to review my business purchase contract?
Absolutely. A lawyer can identify hidden risks, clarify obligations, and ensure your contract complies with Queensland law.
Final Thoughts
A business purchase contract is one of the most important documents you’ll sign in your entrepreneurial journey. Understanding the key clauses—contingencies, warranties, and indemnities—can help you avoid costly mistakes and secure a fair deal.
At Fulljames Law, we provide practical, client-focused legal advice for business sales and acquisitions across Queensland. We’ll help you navigate the process with clarity, confidence, and peace of mind.
Disclaimer
This article is provided for general informational purposes only and does not constitute legal advice. You should obtain professional advice specific to your circumstances before acting on any of the information provided.