It’s important to familiarize yourself with the ins and outs of an M&A purchase agreement so you can go into your next transaction prepared.
Think of a purchase agreement as a more detailed LOI. While it contains the same terms as the LOI, it also includes additional terms and conditions and goes into greater depth.
Here are the primary components of an M&A purchase agreement:
Definitions: Before agreeing to the terms in a purchase agreement, it’s important to clarify the terms so everyone is on the same page. Many terms in a PA can seem ambiguous and up to individual interpretation. Taking the time to define these terms can clear up confusion upfront and is one more step towards ensuring a smooth transaction from start to finish.
Indemnifications: This part of the purchase agreement helps to protect the buyer from any issues that may arise after closing and draws a clear line of responsibility in the sand. Often heavily contested and litigated, indemnifications address which actions are covered, how long the indemnification period lasts, financial caps on damages, etc.
Representations, Warranties and Schedules: This is where the seller states what is true about the business at the time of sale. This can include up-to-date financial statements, any current environmental liabilities, ongoing litigation and employee benefits.
Execution Provisions: What money is being exchanged and in what forms? Are there any purchase price adjustments, escrows or earnouts? This is where all financial details relating to the purchase are spelled out.
Covenants: These are agreed upon behaviors between buyers and sellers. They can address the hiring of new employees as well as bonuses and raises instituted by the seller between the signing of the purchase agreement and the closing. They can also address post-closing behaviors such as non-compete agreements and D&O insurance.
Closing Conditions: This is the part of the purchase agreement where you detail requirements of both the buyer and the seller between the purchase agreement and the closing table. These requirements are specific to the transaction and can include special financing conditions, provisions stating that all representations and warranties are met, material adverse change clauses, etc.
If you want help creating a thorough M&A purchase agreement, we’d love to assist. We can be reached at 612.331.8392 or by email at firstname.lastname@example.org.