The Purchase Agreement is the principal arena of negotiation. Understanding the document and its risks is foundational to the sale of your business.
The Purchase Agreement will contain a section that might be titled “General” or “Miscellaneous” or something similar. It may also include a section containing certain definitions for terms used throughout the Purchase Agreement. These provisions are sometimes called “boilerplate” provisions. However, they can be just as critical to the parties as the sections described above. These provisions typically help answer the following questions:
If the transaction is not a sign and close, then the Purchase Agreement will contain provisions regarding how a party may terminate the contract. Typically, the Purchase Agreement will provide that it may be terminated as follows: the mutual written consent of the parties; by either party if there is a court order permanently restraining, or otherwise prohibiting the transaction; by either party if the closing has not occurred by an agreed outside date, unless the failure to close by such date is because of any failure to fulfill any obligation under the agreement by the party seeking to terminate; by either party if the other party in material breach of the agreement, and such breach is not cured after notice and a reasonable cure period;by the Purchaser at any time; except that the Seller might require a termination payment from the Purchaser in exchange for agreeing to this right.
The representations and warranties section of the Purchase Agreement, together with the indemnity section discussed below, is typically the most negotiated section of the agreement. Representations and warranties are statements of fact and promises about something. The Seller and its owners will be making several representations and warranties about the Target and its assets. If the Transaction is stock deal, there will also be representations and warranties about the Target’s equity. While the Buyer may have conducted its own due diligence, it will still expect the Target and Seller to confirm several facts and circumstances through the representations and warranties, and then stand behind them through their indemnification obligations.
If there will be a delay between the signing of the Purchase Agreement and the closing of the Transaction, then the Purchase Agreement will include certain pre-closing covenants. Most of these will be made by the Seller in favor of the Buyer and are intended, generally, to give assurances to the Buyer that there will be no surprises during the interim period or at closing. The Buyer may also give the Seller pre-closing covenants. These are usually limited to the Buyer agreeing to obtain all applicable governmental and third party approvals and consents and perhaps to secure financing to fund the purchase price.
Business Deal Terms are the heart of the principal transaction terms: what is being purchased; the purchase price; when and how the purchase price will be paid; and employment or consulting terms for key personnel, including whether the Seller will continue as an employee or otherwise provide consulting or transition services to the Buyer.
In any sale of a business, there are a number of documents that are negotiated and delivered by the parties, the principal of which is the Purchase Agreement. This is the contract that contains the “guts” of the deal and is what the parties will likely spend the most time negotiating.