Nine Steps to a Successful Business Sale – Part 5: Documenting the Transaction

In Part 4, we discussed managing the terms of the sales transaction.

We’ve noted in earlier parts of this article that the sale of a business transaction is document intensive. In this part, we consider some of the issues involved in documenting complicated business sales.

Step 5. Documenting the Transaction.

Business acquisition documents can be complicated, depending on the transaction, because they will contain all the business, legal, and economic terms of the transaction. It’s generally useful to have your M&A attorney and accountants take charge of the documents at this stage, but make sure to spend time with them clarifying your goals and objectives.

The documents you can expect in a business sale include: 

1. Non-Disclosure Agreement. This document protects your sensitive or confidential business information from being disclosed to parties outside of the transaction. So, make sure to enter into this agreement before having any substantive discussions on the sale of the business.
2. Term Sheet, Letter of Intent or Memorandum of Understanding. While it can have several names, it is a document used at the beginning of the process to get a general agreement on the major terms. It saves time in the negotiation process for the major terms of the sale by removing a lot of the legalese and focusing on the business aspects. Along those lines, it should specify that it is subject to final, formal signed documents, which typically means that it can be revised by the formal documents, if necessary. 
3. Due Diligence Request Lists. After the non-disclosure agreements have been signed, the due diligence process begins. The buyer’s attorney will provide an extensive list of due diligence items to be provided by the seller and you should expect this list to be revised and expanded as the process goes forward.
4. Purchase Agreement. The Purchase Agreement provides for the purchase and sale of the business assets (or the stock of the business). If the transaction is a merger, there would be a Merger Agreement instead.  The Purchase Agreement will contain terms covering:

• Price and price adjustment
• Payment terms
• Representations and warranties of the company’s business, assets and overall condition
  • Depending on the transaction, there may be key assets, such as strategic intellectual property, that will be the subject of separate representations and warranties. Company management will need to work closely with M&A attorney and accountants to be sure the representations and warranties are stated correctly, so as to avoid post-closing disputes. 
• Representations and warranties of the purchaser
  • If the transaction is a stock sale, representations and warranties of the selling stock holders.
• Any closing conditions to be met
• Earn-out provisions, if an earn-out is used to bridge a valuation gap between buyer and seller
• Bank or other institutional financing provisions, with accompanying bank loan documents and promissory note 
• Seller financing provisions which may be in a separate agreement 
  • If seller financing is used there will be a separate loan agreement and promissory note.   
• Subordination and intercreditor provisions and a separate subordination and intercreditor agreement, to set out the hierarchy of loans and claims on collateral 
• Financial statements and schedules 
• Schedules of assets and properties, and schedules of liens, security interests, and encumbrances on those assets 
• Provisions allocating the purchase price among the various assets (in an asset purchase) 
• Provisions regarding payment of existing debt or other obligations of the seller Indemnification and limitation of liability provisions 
• Provisions regarding insurance coverage of identified risks in the transaction (if applicable) 
• Other provisions as may be required by the transaction 

5. Employment or Consulting Agreements. These documents address any people who are staying with the buyer, including the owner during a transition period, post–closing. They will set the terms of those employment agreements.
6. Bill of Sale and Assignments of Assets. In an asset sale, there will be a bill of sale that conveys title to the assets. Certain assets require specialized transfer documents to transfer ownership properly. Intellectual property assets may require assignment filings with the Patent and Trademark Office.
7. Key Contract Assignments. If the assignment of important contracts, leases, etc. requires the consent of other contracting parties, they will need to be obtained in a key contract assignment document.
8. Licenses. If the seller operates the business under a license, for example a patent license, approval of the licensor to transfer the license to the buyer is required.
9. Permits and Regulatory Approvals. These documents facilitate the transfer of any government permits or regulatory approvals that must be transferred to the buyer.
10. Closing Checklist. Counsel for buyer and seller will create a closing list, setting out all the documents that need to be signed at the time of the signing of the purchase agreement, and those that must be subsequently delivered at the closing. These must be subsequently delivered at the closing.
11. Post-Closing Obligations. The purchase agreement may require that certain things are done after the closing occurs, these are called post-closing obligations. Your M&A attorney and accountants will monitor these obligations and make sure they are completed.
12. Resignations. Depending on the transaction, the resignation of one or more directors, officers or employees might be required.
13. Board and Shareholder Consents. The approval of the board of directors of the seller will be required to close the transaction. Both parties’ shareholders’ consents may also be required, depending on various factors. Make sure to schedule enough time to obtain these consents, particularly if a board meeting or shareholder meeting must be called.

To add to the complexity, as the negotiations continue, there may be modifications to the purchase agreement and related ancillary agreements.

Mergers & Acquisitions lawyers and accountants are critical to this process.  Be sure you have good ones to make your business sale smooth and painless.

In the next part, we’ll discuss timing and strategy for the critical decision of when to communicate that the transaction is occurring, to the board, shareholders, employees and other stakeholders.