Although your long-term business goals may include an IPO, most SMB equity events are stock purchase agreements. Stock purchase agreements help you raise capital by selling part of your equity to a private investor.
With stock purchase agreements, you can sell shares of your company directly to buyers outside the stock market. With the money you raise from company stock sales, you can fund new business initiatives without going public. Because you and your buyers sign legally binding agreements, you can protect your assets — and your company — as you raise money.
We’ll explain everything business owners should know about stock purchase agreements and share a stock purchase agreement template to make the process easier.
What is a stock purchase agreement?
A stock purchase agreement is a two-party contract that dictates transactions around a company’s shares. Stock purchase agreements are standard among small corporations; they provide capital while allowing business owners to retain a controlling interest. Usually, a stock purchase agreement empowers the business owner and company shareholders to sell stocks.
How does a stock purchase agreement work?
A stock purchase agreement formally transfers ownership of your company’s stocks between two parties. Here are some crucial elements of stock purchase agreements:
- Stock purchase agreements affect company ownership. When shares of your company’s stocks exchange hands, your company’s ownership also changes. Someone who sells all their stocks to another party no longer has any stake in your company, while the new buyer gains a stake in your company equal to what the seller previously had (or more if the buyer already had stock in your company).
- Stock purchase agreements differ from asset purchase agreements. Asset purchase agreements govern transactions of specific assets or liabilities rather than company ownership shares. For example, if you sell your equipment to another company, you may want to sign an asset purchase agreement because no company ownership changes will occur. But if you sold shares of your company to the other party, a stock purchase agreement would be in order.
- Purchasers assume all assets and liabilities. Notably, when buyers purchase shares of your company, they assume all assets and liabilities tied to your stocks even if you don’t disclose them.
If you’re a company owner selling your business, you must consider more than the purchase price. You’ll also have to factor in salary guarantees, stock payouts, future ownership stakes and more.
Who needs a stock purchase agreement?
Financial regulations state that, for any stock transaction, both parties must give written consent. If you’re preparing to sell stocks in your company, you’ll want to have a stock purchase agreement template readily available that you can easily modify to reflect the terms of the sale and the buyer’s information.
How do you create a stock purchase agreement?
Before you create the stock purchase agreement, you must take several crucial steps.
1. Value the company before creating a stock purchase agreement.
To know how much to sell your shares for, you must know your company’s value. There are several ways for you and your finance team to value your business. One common way to calculate its value is by taking its net profits and using a multiple, usually between two and 10, depending on the business’s projected growth rate.
Your valuation will hinge on several factors outside of EBITDA (earnings before interest, taxes, depreciation and amortization), including recurring revenue and revenue growth in the past year.
Other factors that affect valuation include key employee turnover, competitive advantages, profit, growth opportunities, barriers to entry and the strength of your management team.
2. Get investor agreement before creating a stock purchase agreement.
Present your company valuation to the business investor as part of your business plan, and explain how you got to this number. When presenting to the investor, ensure they understand every aspect of the valuation.
The business owner and investor must agree with the valuation. If the investor doesn’t agree with the valuation, a stock purchase won’t happen.
3. Decide on a share price before creating a stock purchase agreement.
Based on your valuation and the percentage of company equity you’re willing to give up, you will come up with two numbers:
- The amount of money you are raising
- What the investor gets for that amount
If you’ve ever seen the show Shark Tank, you’re familiar with this concept. An entrepreneur might say, “I’m asking for $500,000 for 25 percent of the company.” In this example, the total company valuation would be $2 million.
For the sake of easy math, you may need to issue more shares before your stock sale because you’ll be giving the investor a specific number of shares, and they must equal the investment amount at the agreed-upon valuation.
Tracking industry trends reveals the highest small business valuations: Industrial IoT (internet of things) has multiples as high as 17.2 on recurring revenue, fintech (financial tech companies) has up to 16.4, and B2B SaaS (software as a service) has up to 14.1.
4. Agree on additional terms before creating a stock purchase agreement.
Some stock purchase agreements are relatively straightforward, while others are more complex. A simple one would be a sale of voting shares for money. However, you may agree that some or all the shares you sell will be non-voting, so the investor won’t have a say in how the business is conducted. Or an investor with more leverage may insist on having some options to buy more shares at specific profit triggers.
5. Have your financial statements ready before creating a stock purchase agreement.
Stock purchase agreements typically include financial information so the investor understands precisely what they’re buying into. Financial information usually includes the following:
- Profit margin
- Tangible assets (like equipment)
- Intangible assets (like digital assets and intellectual property)
There is also a period of due diligence during which the investor can verify this financial information. To ensure your stock sale goes smoothly, have your financial reports and other relevant documents in order so the investor can inspect them.
6. Write up stock the purchase agreement.
Consult a business attorney to help write your stock purchase agreement or review it and make suggestions before you present it to your investor.
A stock purchase agreement typically includes the following information:
- Your business name
- The name and mailing address of the entity buying shares in your company’s stocks
- The par value (essentially the sale price) of the stocks being sold
- The number of stocks the buyer is purchasing
- The transaction’s date, time and location
- Seller and buyer warranties and representations
- Information on employee bonuses, employee benefits and potential employee issues
- An indemnification clause to address unexpected costs
The above information is typically grouped into several articles that comprise your stock purchase agreement’s structure.
Stock purchase agreement template
Here is a stock purchase agreement template you can copy and paste into a word processing program and save to your company files. This template is intended as a guide only and does not constitute legal advice. Always consult with legal counsel before finalizing legal documents.
This Stock Purchase Agreement (“Agreement”) details the terms and conditions of the contractual agreement between the below parties:
Buyer (“Buyer”): [Name, mailing address]
Seller (“Seller”): [Name, mailing address]
WHEREAS, Seller plans to sell [number] shares of [type] stock, or [number] percent of the outstanding shares belonging to [Your company name] (“Company”), a [State] corporation, and
WHEREAS, Buyer plans to purchase the stock and agrees to the terms and conditions outlined below.
THEREFORE, Buyer and Seller (individually, “Party”; together, “Parties”) agree as follows:
Seller will sell each individual stock to Buyer for $ [number]. Buyer will thereby pay a total of $ [number] to the buyer. [Optional inclusion: Within [number] days of signing this agreement, Buyer will place a deposit of $ [number] to Seller.]
IV. CLOSING DATE
Upon signing the Agreement, Seller shall commence the transfer of shares to Buyer. The closing of this transaction shall take place on or before [date] (“Closing Date”). On the Closing Date, Buyer shall send money to Seller via [specific money transfer method].
[Optional Clause] V. DUE DILIGENCE
Buyer requires a due diligence period in which Buyer will inspect the finances of Seller and Company. Buyer will have sole discretion over whether the shares are valid for the intended sale, with Buyer’s decision being final and binding for the Parties. Buyer shall deliver the verdict of their due diligence no later than [month and day], 2023, at [time]. Should Buyer choose to terminate this Agreement after performing due diligence, all deposits made shall be returned to Buyer.
Seller represents, warrants, and agrees to and with Buyer as follows on the Closing Date.
- The Company is a legally recognized corporation formed according to the laws of [State];
- The Company is in good legal standing in [State]; Seller and the Company are not aware of government or third-party proceedings, investigations or claims against the Company;
- Seller claims full ownership of the shares being sold; Seller holds share titles void of restrictions on transfer, encumbrances or other title defects;
- Seller is able, by state and federal law as well as Company bylaws, to enter into and carry out the Agreement, including the offer, sale and transfer of shares to Buyer, and has taken all required steps to legally do so;
- Seller is not a party to any contract regarding the shares being sold;
- There are no restrictions, other than relevant securities laws, regarding the offer, sale and transfer of the shares.
Buyer and Seller agree to indemnify both Parties from and against all claims, liabilities, losses, damages, costs and expenses (including attorney’s fees) arising directly or indirectly from:
- Failure to execute the obligations established in this Agreement;
- Inaccuracies or breaches in representations and warranties established in this Agreement; Actions, suits, arbitration, litigation, investigations, proceedings, claims or liabilities that arise as a result of the sale of shares.
No modification will be made to this Agreement unless in writing and signed by the Parties.
IX. ENTIRE AGREEMENT
This agreement comprises the entire agreement of both Parties relating to the subject matter herein and supersedes all prior written and oral agreements, understandings, discussions and negotiations between the Parties.
This Agreement and the terms herein shall be construed and governed in accordance with the laws of the State of [State]. The Parties irrevocably submit to the jurisdiction of any and all federal and state courts located in [County], [State].
IN WITNESS WHEREOF, both Parties have agreed to this Stock Purchase Agreement electronically or in person by duly authorized officers as of the below day and year.
Jennifer Dublino contributed to this article.