The Stages in Buying and Selling a Small Company, Part 2
The seven parts of the Purchase Agreement for a purchase and sale of a business.
In our last article, The Stages in Buying and Selling a Company, Part 1 we discussed Stages 1 to 3 of the “pre-transaction” steps in the process of selling a business. In this article, I will cover stage 4, the development of the Purchase Agreement.
Stage 4: The Purchase Agreement
The Parties typically use the basic terms that were contained in the parties Letter of Intent (“LOI”), discussed in my last article, to structure the more detailed Purchase Agreement – be it an Asset Purchase Agreement or a Stock Purchase Agreement. That Agreement, which governs all the.
“> terms of the transaction, usually includes the following seven parts:
1. Very Specific Details about structure (i.e., Stock vs. Asset deal), and, if it’s an Asset deal – the specific assets being acquired:
Also listed are details about assumed and excluded liabilities;
- Practice Note:
As suggested in the previous article, there are innumerable ways a company sale transaction can be structured that go beyond the mere “Stock versus Asset” considerations.
For example, a Seller might work with a Private Equity Firm (“PE Firm”) that could initially acquire a majority or minority interest in the business to then help the owners grow that business. The expectation would be that the PE Firm could recoup its investment and achieve substantial gains upon a company sale, or “exit”, down the road.
A Strategic Buyer, by contrast – such as a larger company in the same industry – might buy a company to incorporate the purchased business into that Strategic Buyer’s larger platform.
- Practice Note:
In the circumstances mentioned in the above Practice Note, and also in deals outside the Private Equity and Strategic Buyer context, transactions are also sometimes structured where the business owners or key management – all of whom are very familiar with the purchased company’s operations – might be expected to stay on for a certain period after the initial purchase transaction closes.
2. Purchase Price:
Details such as whether the payment is being made up front, is being deferred, and, if payment will be in the form of cash, securities, or a loan, etc., as well as any adjustments that’ll be made to any payments;
- Practice Note:
Sometimes transactions are structured in which a Seller receives part of the Purchase Price and/or additional payments in the form of a post-closing “earnout.”
Those earnouts are typically tied to benchmarks or performance levels the Company must meet. Earnouts are often paid out over a period of three to five years and, over that period, they can involve anywhere between 10 to 50 percent of the original purchase price being deferred.
Next page- Steps #3-#7
