Acquisition Agreement Terms
Although the specific terms and provisions of the agreements used for business acquisitions are custom drafted, depend on the form of the transaction, and are unique to each deal, all such agreements usually have similar provisions.
Purchase Price and Deal Points. The agreement will have “deal points.” These provisions will identify the assets or ownership interest to be sold, the purchase price, and when, where, and how the purchase price will be paid. The agreement should have other terms such as the closing date, methods of transferring the assets or ownership interest bought, earnout provisions, employment contracts, financing provisions, non-compete agreements, and the like.
Buyer's Due Diligence. The agreement usually will have a provision requiring the seller to deliver certain items to the buyer for its review as a part of the buyer's research and investigation of the corporation to be acquired. This process is called buyer's due diligence.
Access to Books and Records; Confidentiality. As an additional part of the buyer's due diligence, the buyer normally requires that buyer and its representatives have access to the seller's business, books, and records and a commitment from the seller to provide any additional information the buyer may request. Seller typically required a nondisclosure or confidentiality provision requiring buyer to treat such information as confidential.
Covenant Not to Compete. The buyer may require the seller and its owners to sign a covenant not to compete with the acquired business for the time and distance the parties will negotiate.
Representations, Covenants, Conditions, and Indemnities. Usually, an acquisition agreement has representations, covenants, conditions, and indemnities. Representations are the seller's way of saying what the condition of its business is at the time of signing the agreement and again at the closing. They are a snapshot of the business at the time referred to in the agreement and are a risk allocation method. A covenant is a provision requiring the signer to take or not take certain actions. A condition is a provision that allows the party benefitting from the condition not to go forward if the condition is not met. An indemnity is a provision that requires a party to be liable and pay the expenses and damages of the other party if certain actions occur or fail to occur.
Consents. The agreement will typically require seller's governing persons and owners to sign formal consents to approve the agreement.
Destruction, Damage, or Taking Before Closing. The agreement normally requires the seller to be responsible for any risk of asset loss between signing the agreement and closing. If there is a loss, the buyer usually can terminate the agreement or require the seller to convey the assets and assign the insurance proceeds to the buyer. Another option is to reduce the purchase price by the value of the damaged or destroyed assets.
Termination. A typical agreement will have a provision letting the buyer terminate the agreement if the buyer's closing conditions are not satisfied or if the seller breaches the agreement.
Breach by Buyer or Seller. The agreement should also address buyer's or seller's refusal to close and set out the remedies for each.
Indemnity. Another typical provision deals with seller and the owners indemnifying the buyer for any damages incurred by buyer for any breach of the agreement.
Obligations of Seller Pending Closing. The agreement can have agreements from the seller setting out certain actions that the seller must take before closing.
Buyer's Conditions of Closing. Most agreements provide that Buyer's closing conditions must be satisfied before the buyer is required to close.
Closing. The agreement will set out the date and location of the Closing and what must happen at the closing. It will typically provide what documents will be exchanged.
Prorations. The agreement will also describe how expenses are prorated in an asset sale. Typically, these are prorated as of the day of closing. The agreement will also set out how the expenses of closing are paid.
This informational memorandum is provided as a courtesy to provide readers with items of interest in the business acquisition area. It is not intended to be an exhaustive treatment of its subject matter but an overview of some elements of such subject. It is not intended to be legal advice or a legal opinion and should not be relied on in making legal or business decisions. If you have questions, please call.
