The purchase agreement is the legal document that officially seals the deal between buyer and seller. While each transaction is unique, most agreements contain the following sections:
- Sale and Purchase – This section includes the terms of the transaction such as the Buyer and Seller names, type of transaction, Stock, Asset, or Merger, and the purchase consideration, the agreed-upon amount that the buyer will pay the seller. Consideration can be cash, stock, seller notes, or earnouts.
- Reps and Warranties – These are detailed statements asserting that all information Buyer and Seller have provided is true in order to mitigate risk. Reps and warranties help confirm due diligence for the Buyer and provide assurance to the Seller that the Buyer is capable of moving forward with the transaction.
- Indemnification – If the Seller violates the agreement, for example, by not disclosing a liability in the Reps and Warranties schedule, the Buyer can seek recourse against the seller. There are various ways the Buyer can be paid including escrows, where funds are placed in a third-party account and holdbacks, where the Buyer “holds back” a certain amount of the purchase price until a reasonable period of time after the deal closes. Duration, thresholds, deductibles, and caps will limit how much, and when the Buyer can seek financial compensation.
- Closing – This section explains the conditions necessary to close the transaction. Sometimes there is a period between signing the agreement and closing the deal, typically with publicly traded companies that require regulatory approval.
- Termination – In some cases, even after signing an agreement, a transaction will not close either due to mutual consent or because Buyer or Seller decided to terminate the agreement. This section will explain each party’s termination rights including issues like breakup fees.
Although the drafting of the purchase agreement comes toward the end of the M&A process, it’s helpful to consider some of these legal issues earlier on so you can maximize the value of your acquisition. For example, outlining your preferred deal structure in the letter of intent, which is signed prior to the purchase agreement, will place you at an advantage. If, during negotiations for the purchase agreement, the other party wishes to change the deal structure, you can always point back to the LOI as a precedent. In these scenarios you may “trade” with the seller for a more agreeable outcome such as changing the deal structure for a lower purchase price. Consulting the right expert to help navigate the intricacies of the legal aspects of an acquisition will help place you in the best position for success.
Learn more in our webinar on Contemporary Legal Issues in M&A led by attorney Alexander Lee.
Date: Thursday, October 18
Time: 1:00 PM EST / 10:00 AM PST
CPE credit available.