A business acquisition is a transaction in which a purchaser buys an existing business from its owner or owners. There are three basic ways in which a person or business may purchase, or acquire, another as follows:
- The buyer can purchase stock of the company;
- The buyer can the assets of the company;
- The buyer can merge the seller’s existing business with the buyer’s existing business.
Each of these three types of transactions has very different tax, legal, and economic consequences to the parties. Each one requires structuring the sale and purchase transaction very differently. This would indicate that a different type of acquisition agreement would be needed in each case.
Although business acquisition agreements differ in details, they may all share some similarities. The typical agreement contains the following:
- Terms of the Transaction: Identification of the specific assets or stock to be transferred to the buyer, the consideration to be paid, and the mechanics of the transaction. This would be the core of the deal;
- Provisions of the Terms: Specific conditions placed on the terms of the transaction, such as whether the seller would remain employed after the sale and provisions for other employment contracts of existing employees;
- Stock Provisions: If stock or other securities are exchanged as payment, terms relating to transfer and registration;
- Representations and Warranties of the Seller: This would include such items as assurances of good title to real estate assets, warranty of profitability, and the like;
- Representations and Warranties of the Purchaser: The most important point here would be the purchaser’s assurances regarding payment. So, for example, there might be provisions for an escrow account along with descriptions of the responsibilities of each party and the schedule for performance in order for the account to achieve its purpose and then close;
- Covenants of the Seller: This could include promises to do or not to do something before closing. A purchaser should concern themselves with how the business is going to operate between the signing of the sale agreement and the date when the purchaser takes over the daily operation of the business. There could be any number of things that a purchaser would want to control to the extent possible during the transition period;
- Conditions for the Purchaser’s Obligation to Close: Events that must happen for the purchaser to be bound to buy from the seller
- Conditions that Apply to the Seller’s Obligation to Close: Events that must happen or acts the purchaser must take for the seller to be bound to close the sale to the purchaser;
- Closing and Termination Provisions: Again, this would include provisions regarding the technical mechanics of finalization of the deal;
- Indemnification Clauses: An indemnification clause is a provision in a contract providing that one party will pay, or indemnify the other in the event the other sustains some loss connected with the agreement;
- Other Clauses: These might include fees to be paid to brokers or any other intermediary involved in the transaction, agreements regarding expenses such as the services of accountants or common trade agreements.
Courts consider it a part of the fiduciary duty of the members of the board of a corporation to pursue the highest possible price for the sale of the corporation. This would mean that a corporation should not quietly negotiate with only one potential buyer, but should seek out others to optimize the value of the sale price.
On the other hand, a business may not want to disrupt its existing relations with employees, suppliers and customers or clients by making a pending sale public. So, it may prefer quiet negotiations with a single potential buyer, who may even have been the one that came to the company with the idea of a sale.
A possible solution to this dilemma is for the selling corporation to work to get a “go shop” clause in the acquisition agreement. This gives the seller the right to “test” the market and shop around for a better acquisition proposal. Usually this option is only open for a limited time following the signing of the acquisition agreement by both parties.
Needless to say, this may not be welcome by the potential buyer, because it leaves open the possibility that the seller will find a better offer and be in a position to command a higher price. Or, the seller might sell to a different person or entity. Nonetheless, it is an option if buyer and seller can agree on a mutually acceptable process.
A complete acquisition agreement should list all inventory and assets in the sale as well as the names of the businesses involved and the owners. A seller especially wants to be sure to determine how the business will be run prior to closing the sale transaction, and the degree of access to and involvement in the company that the buyer will have before the deal closes.
It is especially important not to leave any assets and liabilities out of the agreement. Failure to disclose all such information can create problems even after the sale has been finalized.
Assurance Proved by the Business Seller
The seller in an acquisition agreement must provide much more information and assurance to the purchaser than does the seller, because in most cases the seller’s main goal is to get the best price for the sale of the business.
The purchaser only must provide comparable assurances if the seller is retaining stock in their former business, because the seller may be constrained from selling their stock for a significant amount of time.
Can I Use an Agreement from a Past Acquisition?
Using an older agreement from a former transaction or even a template found on the internet as a model is a very common mistake that can lead to many problems for both parties. Of course, every transaction is unique in some ways and using a form from past acquisitions or a template risks entering into an agreement that is not as good as it could be.
Or, the agreement may simply not fit the transaction at hand. Keep in mind that there are three different types of sales, as noted above, sale of stock, a merger and a sale of assets. Each one is going to require its own kind of agreement.
In addition, bringing out a contract from a previous sale may not be a good negotiating strategy as it informs the seller of the terms to which the buyer was willing to agree in a previous sale. The buyer might be able to do better in the current transaction by starting from scratch.
If a party to an acquisition wishes to save time, then they might start with a preliminary form that does not contain lots of detailed terms. It can be useful as a starting point for the current deal but does not disclose information about past deals.
Do I Need a Business Attorney?
The best strategy would be to consult a business attorney experienced in acquisitions. The attorney could not only draft the agreement and probably provide valuable advice about the terms that such an agreement should contain. For example, an attorney is likely to know what kind of indemnity clauses a contract should contain and how they can be deployed to protect both a seller and a buyer.
The attorney could also assist with the negotiation of the agreement and this might produce a better result. Especially if a person is new to business acquisitions, they would probably do well to involve a business attorney in both negotiation and drafting of the agreement. This is advisable especially if the other party is very experienced and savvy.
If you are selling a business, you want to be sure you are making the best possible deal. Do not be talked into believing any promises about the acquisition agreement without first having it reviewed by a good attorney, experienced in business acquisitions, who can explain to you what each part means and possibly suggest advantageous improvements.