Purchase & Sale Agreements

KEY CONCEPTS

The buyer and seller must negotiate the price of the product to be sold and the conditions for the transaction before any deal can be agreed upon. A binding and legal contract that obligates this transaction between two parties – the buyer and the seller – is referred to as a Purchase Agreement. The Purchase Agreement is a framework for the negotiations process. It is often used when dealing with a large purchase, such a piece of real estate, or frequent purchases over a period. Purchase Agreements are used by large, publicly traded companies in their supply chains. They are set up to help suppliers and purchasers predict demand and costs, and the more the transaction size increases, the more critical the purchase agreement.

A Purchase Agreement is different from a purchase order template. A purchase order is an offer to purchase goods, while the agreement is the commitment to make the purchase. The Purchase Agreement prices and discounts override all prices and discounts indicated in any commercial contract that may exist.

WHAT IS A PURCHASE AGREEMENT?

A Purchase Agreement also referred to as Sale and Purchase Agreement template (SPA) is a legal contract that requires a buyer to buy and a seller to sell a product or service. When two or more people agree on a deal and the price, then a purchase contract is established. A Purchase Agreement template is also considered an agreement between two parties by which one person (the seller) agrees to deliver a certain thing to another (the buyer) in exchange for a sum of money. Therefore, this agreement carries a series of obligations and rights for each of the parties.

Sale and Purchase agreements are found in all types of businesses but are mostly associated with real estate deals to finalize the interests of both parties before closing the deal. Not only do SPAs dictate the terms of the sale, but they also contain detailed information about the buyer and the seller.

They serve as a record of deposits made as negotiations progress, parts of the agreement that have already been fulfilled, or transactions that have already been completed, as well as an official record of when the final sale is to take place.

TYPES OF PURCHASE AGREEMENTS

Within the sale, there are some variations of contracts. As soon as the seller accepts the order, it becomes a binding contract - purchase agreement. The type of purchase agreement you will use will depend on your situation. Some of the most popular purchase agreements downloaded by business professionals in Business-in-a-Box include the agreement of purchase and sale of shares template, the buy sell agreement, agreement of purchase and sale of shares by shareholder template and the bulk sale agreement. However, you will find that there are purchase agreements that go beyond these.

Standard Purchase Agreement

This is the most widely used type of purchase agreement. Standard purchase agreements are typically used for one-time purchases. In this type of purchase agreement, details about the items to be purchased, quantities, payment terms and the delivery date are outlined.

Planned Purchase Agreement

When partnering with a single supplier as your sole source of specific goods or services, a planned purchase order is required. It is a long-term agreement committing to buy items or services from a single source. Tentative delivery schedules and all details for goods or services that you want to buy, including charge account, quantities, and estimated cost must be specified.

Blanket Purchase Agreement

A Blanket Purchase Order incorporates several potential orders into one. It basically outlines the items and total quantity needed. It may or may not include pricing. If it does not include pricing, it may include price breaks that the seller is willing to offer.

A Blanket Purchase Agreement is created when you know the details of the goods or services you plan to buy from a specific supplier in a period, but not the details of your delivery schedules yet. When you need to specify negotiated prices for your items before purchasing them, a Blanket Purchase Agreement comes in handy.

Contract Purchase Agreement

When a Contract Purchase Agreement is involved, the buyer does not know which item or items will be ordered, instead, you agree upon terms and conditions with your supplier with the idea that these items and quantities will be known in the future. It is often set for a year and acts like a legal document. During the contract period, the buyer can send in a Standard Purchase Order that includes the details needed for each purchase.

IMPORTANCE OF A PURCHASE AGREEMENT

There are many advantages of using a Purchase Agreement template over outright buying equipment. These advantages include the following:

1) It Minimizes Risks

A Purchase Agreement helps reduce the risk of losses and getting sued. When the terms of agreement are clearly mentioned and signed by the important parties, it reduces a proportion of risk.

It will also give the right to take legal action in case any of parties fail to meet the conditions mentioned in the contract. Doing this will provide you grounds to take legal action if any of the conditions mentioned in the contract are not met.

2) Clarity

A purchase agreement contains all important details related to the contract and expectations from each party. Hence, it is useful in providing clarity to employees, and both sellers and buyers.

3) Low Initial Financial Commitment

Purchase agreements help businesses to buy equipment that would have been difficult to acquire due to financial constraints. This is especially useful for small and medium-sized businesses. They help businesses to generate revenue within a short period of time with the acquired equipment and get their business up and running with minimal financial commitment at the start.

4) Purchase of Better-Quality Items

Purchase agreements give businesses more flexibility in what they buy, by allowing them to shop around for more costly and quality equipment.

HOW TO DRAFT A PURCHASE AGREEMENT

Below is a guideline on how you can create your purchase agreement.

1) Mention Parties and Date of Agreement

Address the intention of participating parties in the first section of the Purchase Agreement.

2) Delivery

Mention all aspects about the delivery of the goods and services, which includes place, time, cost, method of delivery. It also specifies the liability of a party in case of a failed delivery or damage during delivery.

It should also include all scenarios including an act of God – flood, fire, riots, etc. – which may be out of the control of both parties.

3) Payment

Deciding the price of the goods and services is the most difficult and negotiated element of the sales contract. Hence, it is important to include the agreed price in written form as soon as it is decided.

4) Severability

In this section, you should include that all other sections mentioned in the contract will remain valid and will be enforced in case any of the provisions is not obliged.

5) Confidentiality

This section talks about the propagation of all information mentioned in the contract. It will specify the persons the information can be shared with and what actions should be taken in case of a breach of confidentiality.

ELEMENTS OF A PURCHASE AGREEMENT

No matter the type of Purchase Agreement you are creating, the following must be included:

• The identity of the buyer and seller which includes their names, addresses, and phone numbers
• A description of the property or items that are being purchased which includes their quantities
• Terms regarding how and when payment will be made
• Price of purchase
• Type of sales
• Contact information for witnesses or consigners
• Dates relating to the fulfillment of various requirements
• Signatures of both parties

Purchase Agreement may also contain additional details such as:

• Any voluntary deposit payment made
• Any warranty the seller makes regarding the quality of goods or their suitability and fitness for their intended use by the purchaser
• Legally required disclosure
• Consequences of default by either party

It is very important that the agreement fully outlines the responsibilities of each party. This is essential to control situations where one of the parties decides to get out of the purchase agreement. It can only happen if there is a breach of contract by the other party.

Therefore, Purchase Agreements must be clearly stated to avoid. It is advisable to have an attorney proofread the agreement once drafted before signing takes place.

HOW TO USE A PURCHASE AGREEMENT

A Purchase Agreement can be prepared by the buyer or the seller. Just like any contract, it can either be a standard document that one party uses in the normal course of business or the result of back-and-forth negotiations. In case additional terms which are not included in the standard agreement are negotiated, they can be stated in a Purchase Agreement addendum.