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 issued involved in documenting complicated business sales.
Step 5. Documenting the Transaction.
The acquisition documents contain all the business, legal and economic terms of the transaction. These can be complicated, depending on the transaction. Your M&A attorney and accountants will generally be in charge of the purchase documents and ancillary documents.
Documents you can expect in a business sale include:
- Non-Disclosure Agreement. It’s best to enter into this before having any substantive discussions on sale of the business.
- 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 should specify that it is subject to final, formal signed documents.
- Due Diligence Request Lists. Early in the process after the non-disclosure agreements have been signed, the due diligence process begins. Counsel for the buyer will provide an extensive list of due diligence items they request from the seller. The seller should expect that the due diligence list may be revised and expanded as the process goes forward.
- 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 busines, 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 counsel 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.
- Many transactions are structured so that the parties sign the purchase agreement and have a binding agreement subject to certain conditions, with the conditions to be satisfied prior to the formal closing. If this is the case, the Purchase Agreement will include the closing conditions to be met.
- Earn-out provisions, if an earn-out is used to bridge a valuation gap between buyer and seller. More on this in Part 7.
- Bank or other institutional financing provisions, with accompanying bank loan documents and promissory note.
- Seller financing provisions, if seller financing is used. More on this in Part 8. 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.
- Employment or Consulting Agreements. If one or more key persons of the seller are going to be retained by the buyer post-closing, there will be employment or consulting agreements for those persons. If an owner is going to stay on for a period of time to oversee the transition and help move the business forward, the owner will have a consulting or employment agreement for that purpose.
- 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.
- 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.
- 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.
- Permits and Regulatory Approvals. Depending on the business, there may be government permits or regulatory approvals that must be transferred to the buyer.
- Financing Agreements. As discussed above, there may be several loan agreements, a subordination and intercreditor agreement, and other financing documents.
- Closing List. 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.
- Post-Closing Obligations. The Purchase Agreement may require that certain things are done after the closing occurs. Price adjustment provisions, earn-out provisions, and seller financing notes, among others, have post-closing obligations. M&A counsel and accountants will generally monitor these obligations and make sure they are completed.
- Resignations. Depending on the transaction, the resignation of one or more directors, officers or employees might be required.
- Board and Shareholder Consents. At a minimum, the approval of the board of directors of the seller will be required to close the transaction. Depending on various factors, approval of the shareholders of the seller, as well as approval of the board and shareholders of the buyer, may be required. Care should be taken in the scheduling process to leave enough time to obtain these consents, particularly if a meeting of the directors or shareholders must be called for the purpose.
To add to the complexity, as the negotiations continue, there may be modifications to the Purchase Agreement and related ancillary agreements.
Somewhere in this list, the eyes of most readers began to glaze over. This is the kind of thing lawyers and accountants thrive on. M&A specialists, both lawyers and accountants, are critical to this process. Be sure you have good ones. Give them the information and documents they need. Let them do their job.
We’ll leave the rest of the documentation process to the lawyers and accountants. 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.