Time to put the pen to paper (or just type it up)
As we have taken our M&A journey over the last few weeks, I hope that you have found the information provided useful. Thus far, you have figured out what you want to buy (or sell), found the right candidate, executed a letter of intent and done your due diligence. Now, it’s time to get serious and “put the pen to paper” (or for the rest of modern society, type it up). Yes, I am talking about the purchase agreement. However, what goes into this document? First off, ask what you are buying. Is it just the assets or the whole company? Do you know the difference?
- Asset Purchase Agreement – Simply put, the purchaser is only buying the assets of the company and the seller keeps everything else. This transaction is more common of the two main types of purchase agreements as it provides the most legacy liability protection for the purchaser.
- Stock Purchase Agreement – In this transaction, the purchaser is buying the whole company (both the assets and the liabilities). This type of purchase is done typically when the target company has unique characteristics or customers that could be lost if only the assets are purchased.
Once you decide what you are buying (or selling), you next decide on what goes into the agreement. Some of the key provisions include the following:
- Preamble, Recitals, Definitions – Essentially who are the parties, what is being done and a definition of key terms;
- Purchase and Sale – A description of what is being purchased, how it is transferred and what the allocation of the purchase price will be;
- Purchase Price Adjustments and Earn Outs – A description of adjustments to the purchase price at or after closing (e.g., if the inventory amount is different than the amount agreed upon); any earn outs that the Seller may have for future business;
- Escrow – Any amount of money held back by the Purchaser to ensure that the Seller follows through on post-closing conditions or to cover any post-closing issues (e.g., legacy tax liabilities) that may arise;
- Closing Mechanics and Conditions – When and where the closing occurs, what needs to happen to go to closing, what needs to be done after the closing
- Representation and Warranties – Statements of fact and assurances made between the purchaser and the seller;
- Pre and Post Closing Covenants – Any promises by one party to another related to the transactions (e.g., operating the business as normal, not working with any other counterparties, non-compete, non-solicit, non-disparagement);
- Termination – An outline of ways that the agreement could be terminated and what the consequences of the termination would be;
- Indemnification – A post-closing process to remedy any losses incurred by either party related to promises made in the purchase agreement;
- Miscellaneous – This is where the lawyer language comes in; it contains many of the boilerplate clauses (e.g. assignment, notice, dispute resolution, choice of law, etc.); and
- Disclosure Schedules and Exhibits – This all-important section basically details what is and is not being purchased; it is also where the peripheral documents (e.g., bill of sale, assignment agreement, escrow agreement, etc) are attached.
As always, I don’t recommend you drafting these documents on your own. Your business attorney, business accountant or any other key business advisors can be very useful resources to help you navigate this part of the M&A process. Below are some good M&A links for you to review:
- M&A Resources from The DAK Group leadership team (contact Steve Raymond; he is one of the most knowledgeable M&A professionals I know)
- M&A Process – Steps in the Mergers & Acquisitions Process (corporatefinanceinstitute.
- Mergers and acquisitions – HBR
- M&A Insights | McKinsey & Company
- Mergers, Acquisitions and Divestitures – The New York Times (nytimes.com)
Helpful Resource Pages
- Knowledge Center (eisneramper.com)
- Trout CPA Blog | Tax & Business-Related Topics
- News & Analysis | Littler Mendelson P.C.
- Insights, Analysis & Perspectives for Your Business | RKL LLP (rklcpa.com)
- NFIB Research: Data and Trends Affecting Small Business Owners | NFIB
- The Tax Warrior Chronicles (taxwarriors.com)
As always, please don’t hesitate to email myself (firstname.lastname@example.org), Andy Miller (email@example.com), Christian Miller (firstname.lastname@example.org), Erik Spurlin (email@example.com) or anyone in our office with questions or comments.
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