Mergers and Acquisitions For Dummies (76 page)

When first reviewing the document, deal-makers should focus on the key, very specific areas in the agreement. Because you've already negotiated these aspects, you're making sure the agreement conforms to those negotiations. These main points are

Purchase price:
This point includes any conditions to the Seller getting the full purchase price. Does the Seller have to jump through any hoops to get her dough — in other words, does the deal include contingent payments such as a note, earn-out, and so on? Check out Chapter 12 for more on these structuring options.

What's being sold:
Confirm that the purchase agreement adheres to the deal type (stock or asset) that you've negotiated. I explain these deal types more in the later section “Determine what's being sold, for how much, and when.”

Escrow:
The agreement lays out the amount of escrow, how long that money stays in escrow, and what the Seller needs to do (or not have happen) to obtain that money.

Cash at closing:
This figure is the actual amount the Seller receives in cash after escrow, debt, advisor fees, and taxes come out of the purchase price.

Post-closing adjustments:
Post-closing adjustments (see Chapter 17) are usually relatively straightforward. However, the mechanisms for delivering a post-closing balance sheet (in order to calculate those adjustments), the ability to dispute, and what happens if Buyer fails to deliver necessary information to Seller after close can take multiple paragraphs or even pages, so be sure to review them carefully. If you're a Seller, consult with your attorney!

That's it! Those are the main issues you should be initially concerned with as you make your first review of the purchase agreement. These are the big issues, but they aren't the only issues.

Some M&A deals involve transactions outside the scope the purchase agreement. If the Buyer is assuming some or all of the Seller's debt, is also buying real estate the Seller owns, or is taking over leases from the Seller, those transactions involve other agreements. However, the purchase agreement itself may mention or refer to them.

The following sections outline the highlights of a typical purchase agreement. These agreements often run 50 to 100 pages and up; I'm covering them in a far shorter span than that, so buckle up!

Confirm the name, rank, and serial number of the deal

I call this part, which is usually toward the beginning of the document, the “whereas” section because most paragraphs start with the word
whereas.
This preamble sets the tone for the rest of the document. Here are a few items to verify:

Legal names and addresses of the entities (Buyer and Seller) are correct.

Deal is either clearly defined as an asset sale or a stock sale.

If it's a stock sale, make sure the share information (number of shares issued, outstanding, and authorized) is correct.

Definition of the business is accurate.

Intents of Buyer and Seller are clearly stated — Buyer desires to buy, and Seller desires to sell.

Determine what's being sold, for how much, and when

The purchase agreement also very clearly defines what is being sold: the company's stock or the company's assets. Sellers usually prefer stock deals because of tax reasons. Buyers typically prefer to buy assets because assets can help reduce the worries of
successor liabilities
, or problems caused by the Seller (such as wrongful termination lawsuits) that may pop up after the deal closes. The agreement should also specify the purchase price, the structure of that price (cash, notes, stock, earn-out, and so on), and the amount that goes into escrow.