In prior posts, I discussed legal issues to consider before buying a business, and then discussed major areas to focus on when conducting due diligence with respect to the target business. Generally, the structure of the transaction will be either a purchase of the stock of the entity that owns the business or a purchase of its assets. This post explores important terms that should be incorporated in the purchase agreement, regardless whether it is a stock or asset acquisition.
The purchase agreement is not just full of boiler plate language that you can adopt from an acquisition agreement you find on the Internet. Instead, it needs to be tailored to the deal, and significantly, address any issues discovered during the due diligence.
1. Proper Seller or Sellers. Make sure the Asset Purchase Agreement (APA) or Stock Purchase Agreement (SPA) names the proper seller(s). Through the due diligence, you will learn who actually owns the business. For example, are the assets all owned by one company or are some assets (like real estate or intellectual property) owned by an affiliate or subsidiary. If buying the stock of a private company, the SPA is not just between buyer and the company, but also must include the shareholders owning 100% of the stock. Therefore, the APA/SPA must include all the persons or entities with ownership in the assets/stock of the selling business.
2. Consideration. Clearly state the purchase price (consideration) and the structure for the payment. Is the purchase price to be paid in installments or subject to any conditions? Will there be an escrow set up? Will there be a holdback to secure performance of the Seller or compliance with representations and warranties? Will there be credits to buyer in the event certain financial targets are not met?
3. Holdback/Basket. If possible, a portion of the purchase price should be placed in escrow to (a) ensure Seller's compliance with any obligations it may have to Buyer, (b) create a basket that Buyer can access if Seller breaches any representations, warranties or covenants under the APA/SPA, and (c) address any milestone payments or credits to buyer in the event certain financial performance representations are not satisfied. But, the holdback is not enough as there must be clear language as to when/how the escrowed monies are released to either party. Push for a reasonable holdback because if there is a breach or non-performance, it will be very time consuming and expensive to go after the Seller for any money owed the buyer, assuming the Seller(s) even still has the funds.
4. Representations and Warranties. The SPA/APA needs to include a number of important representations and warranties relating to the business, its assets, financials, liabilities, contracts, employment, environmental, intellectual property, litigation, capital structure, 3rd party rights, licenses/permits, technology, labor, taxes, to name just some of the common representations and warranties. However, you should also address any issues discovered in the due diligence process -- a common example, a consulting agreement that granted a service provider options in the company, which Seller claims the consultant has released. The representations and warranties protect the Buyer, and careful consideration needs to be given to drafting them in any APA/SPA.
5. Covenants. A number of covenants are standard, for example that Seller will cooperate with Buyer as far as executing any documents post closing that are reasonably necessary to effectuate the transaction. The deal, however, might include certain obligations on Seller, and those should be expressly set forth in the APA/SPA.
6. Liabilities. Is the Buyer assuming any liabilities. If you are buying the stock, you are assuming all of the liabilities in the absence of a special carve-out. If purchasing the assets, Buyer can exclude all or some of the liabilities. Detail who is repsonsible for what liabilities.
7. Transfer/Assignments. If any tangible/intangible assets, stock, licenses, contracts, customers need to be specifically transferred/assigned to the Buyer, there needs to be a provision addressing these issues and it might even require a separate assignment agreement or approvals of third parties (i.e., for intellectual property registrations, domain registrations).
8. Transition. It is often a good idea to have key individuals agree to assist with transition of the business to the buyer, especially if the customers have long-standing relationships with certain owners or employees or if there are particular technology issues. If a transition term is part of the deal, specifically define the scope and term of the obligations of the Seller so there is no dispute later on.
9. Tax Matters. Aside from the usual tax representations, consider whether any post closing cooperation will be necessary on tax matters to ensure favorable tax treatment or otherwise.
10. Indemnification. The APA/SPA should include terms regarding the right of and process for obtaining indemnification from the Seller(s) in the event of any breach of the agreement.
11. Schedules/Disclosures. The APA/SPA will likely have a number of disclosures made by the Seller(s) as to exceptions or detailing required information to complete the representations and warranties. Review these schedules carefully to be sure no additional due diligence is required or additional representations/warranties.
12. Termination/Remedies. Set forth any occurrence/event giving the Buyer a right to terminate the transaction, and perhaps any payment/liquidated damages to Buyer if the transaction is terminated due to fault of Seller or even a right to specific performance if Seller is dragging its feet or refusing to close.
13. Confidentiality/Non-Compete. To protect the company's proprietary information and the deal terms, include a confidentiality provision. In addition, demand a reasonable non-compete to avoid the Seller(s) from turning around and opening a competing business with your money.
14. Governing Law/Venue/Attorney's Fees. If an issue arises and you need to pursue a claim you will be happier if in the APA/SPA there are express provisions with respect to the governing law, venue for any claims (what court or alternative dispute mechanism) and perhaps even a clause requiring the loser to pay attorney's fees).
The above is not an exhaustive list of provisions that should be included in the APA/SPA, but it should get a Buyer thinking about the need for not merely a standard APA/SPA, but a well-drafted agreement based on the information gleaned about the business through the due diligence investigation.
Disclaimer: The information is for discussion only and does not constitute legal advice or create any attorney-client relationship.