Buying or selling a business can be a complex matter depending upon the nature of the business being acquired or sold and the structure being used to effect such a sale. Every such transaction is also unique and the considerations faced by a buyer as opposed to a seller can be very different. That being said, there are certain issues and considerations which typically arise in most purchase and sale transactions.
These issues and considerations include:
- basic deal structure – asset vs. shares;
- negotiating – preliminary agreements;
- due diligence;
- financing considerations;
- the purchase and sale agreement; and
- risk allocation.
Basic deal structure: Asset vs. share transactions
Appropriate structure is critical to the success of a deal. Common wisdom suggests that you always buy assets and sell shares (potential liabilities flow with buying the business as a whole which is what would happen if you bought all of the shares) but this does not take into account the reality of many business situations.
These situations include:
- tax considerations;
- due diligence considerations;
- key deal terms:
- representations and warranties;
- allocation of purchase price;
- allocation of consideration; and
- restrictive covenants.
Negotiating: Preliminary agreements
The confidentiality agreement and the letter of intent can set the tone for further negotiations between parties and also serves to assist in bringing issues to light.
- confidentiality agreement / non-disclosure agreement
- primary goals of the agreement are to allow the parties access to confidential information to allow them to further assess a transaction;
- these agreements are typically used in transactions where the parties are concerned about disclosing information to parties which could include potential competitors;
- these agreements should be executed if there are any concerns regarding the use of information being disclosed;
- a mutual agreement is required if both sides are exchanging information; and
- key elements of the agreement and the most heavily negotiated provisions typically include the length of the confidentiality restriction.
- letter of intent / exclusivity agreement
- the letter of intent should be used whenever the parties wish to set out preliminary terms but are still negotiating and carrying out investigations;
- care must be taken to reflect the parties intention on whether they wish the letter of intent to be binding;
- exclusivity provisions are usually heavily negotiated; and
- specific considerations will need to be addressed for asset versus share purchase transactions.
Effective due diligence allows parties to identify issues early in the transaction which ultimately will allow the parties to determine a fair price and ensure that they are going into the transaction with all available information.
Due diligence typically consists of:
- preparing a request list and a due diligence report;
- conducting a corporate minute book review;
- conducting corporate and legal searches and analyzing results;
- reviewing material contracts;
- interviewing employees, suppliers and customers;
- carrying out an industry analysis; and
- financial due diligence.
Business realities often dictate the appropriate financing structure for a deal. While there are many types of financing, the following are the legal considerations related to debt financing and the financing mechanics for a secured loan transaction:
- structure of the loan agreement and loan covenants;
- the role and types of security;
- registering security;
- ensuring that loan covenants have been satisfied; and
- ensuring that the lender is in a position to fund.
The purchase and sale agreement
The purpose of a purchase and sale agreement is to turn a corporate deal into an effective contract.
The principal provisions of the agreement include:
- purchase price and deal specific terms;
- representations and warranties;
- closing conditions, termination rights and their effect on closing certainty;
- indemnities; and
Drafting financial terms in purchase and sale agreements requires both an understanding of accounting concepts and common sense. Financial provisions typically encountered in corporate deals and the issues surrounding those terms include:
- purchase price determination and post‑closing adjustments;
- escrow provisions;
- earn-outs and reverse earn‑outs; and
- financial representations and warranties.
Proper planning can avoid unnecessary delays in closing a deal. In order to effectively do this, the parties must thoroughly prepare for closing. The best way to ensure that the hidden pitfalls are avoided is to have a proper team of professionals involved to guide the parties through the numerous steps of a purchase or sale transaction. At a minimum, any given transaction should have an experienced lawyer and accountant involved to handle the myriad of issues that can arise.
The foregoing is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, please contact the author who would be pleased to discuss the issues above with you, in the context of your particular circumstances.