In the previous blog, I talked about the two most common structures for the acquisition of a business. In this post, I am going to discuss the other parts of a business acquisition agreement. I will try not to bore you ? (but it will be hard). It can be helpful for business owners to understand the purpose of the different provisions of a business acquisition agreement. Your business lawyer is there to protect you, but the more you understand, the better you and your business lawyer will work as a team.
Acquisition agreements contain representations and warranties that the seller makes to the buyer about the business being acquired. The representations and warranties that are contained in most business acquisition agreements have to do with title to the assets, or the stock, absence of liens, a list of any real estate and certain other representations related to such real estate. In addition, the seller will make representations and warranties with respect to its financial statements, any intellectual property, any pending litigation, contracts, compliance with laws, inventory, licenses and permits, absence of undisclosed liabilities and several other representations and warranties depending upon the value and nature of the business. If a seller needs to make an exception to a representation or warranty, it will set forth the exception on a disclosure schedule. This permits the buyer to see what potential problems exist, and to the extent the seller discloses an item on the disclosure schedule, the seller is not liable for any issues arising from the matters disclosed.
The representations and warranties of the buyer in an Asset Purchase Agreement are usually limited to representing that the buyer is a duly organized entity and in good standing. In addition, the buyer will represent that it has the authority to enter into the APA. There is also usually a representation by the buyer that no broker has been engaged in connection with the sale of the business. In a Stock Purchase Agreement, the buyer will also make certain representations that have to do with the sale of the stock falling under an exemption from the registration requirements under both federal and state securities laws.
A business acquisition agreement will contain a section on the conditions required in order for buyer and/or seller to be required to close the purchase. If the business acquisition agreement is signed at the same time of the closing of the sale, this section is not necessary. Generally, conditions to closing include requirements that the representations and warranties made when the agreement was signed are true and accurate, that there has been no material adverse change in the business, any consents required to close the acquisition have been obtained and there may be additional conditions depending upon the specific transaction.
The business acquisition agreement will contain a date that closing will occur, as well as the location of the closing. In addition, there are often post-closing covenants, such as an agreement of the seller not to compete with the business being sold for a certain time period.
Indemnification is a promise by either party to make the other party “whole” because of a breach of a representation or warranty, failure to perform any covenant contained in the agreement and any other provisions that the buyer and seller agree to. In addition to the Indemnification section, some acquisition agreements will provide for an escrow of a portion of the purchase price to secure the indemnification obligation.
Depending upon the size of the transaction, there may be other provisions that are negotiated, such as a provision referred to as a “basket.” A basket will provide that one party is not liable to indemnify the other party until and unless the amount of the basket has been reached. This is done to avoid small, annoying claims.
As you can see, a business acquisition agreement can get very complicated, and it would be wise for either a buyer or a seller to engage a business attorney familiar with structuring, negotiating and drafting acquisition agreements as soon as the decision is made to sell or to buy a business.