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By: Patrick B. Mathis

The Definitive Agreement

Once the buyer and seller have entered into a letter of intent (“LOI”) the parties’ attorneys will then begin drafting of the definitive agreement. While the general terms are outlined in the LOI, the definitive agreement contains detailed provisions regarding the terms and conditions of the transaction.

Definitive agreements will generally include the following:

1. The anticipated structure of the transaction, i.e. an asset purchase/sale, a sale of stock or member interests, a merger of the two business entities, or other arrangements. (An asset purchase agreement is often referred to as an “APA” while a stock purchase agreement is referred to as an “SPA”.)

2. The purchase price.

3. The terms for payment, i.e. a down payment, the amount due at closing, deferred payments and/or escrowed amounts to cover contingencies.

4. Terms of deferred payments, i.e. an earnout based upon post-closing performance of the business, a deferred portion secured by a promissory note and mortgage or security interest in the business assets, personal guarantees of the owners of the buyer, an irrevocable letter of credit, or other post-closing contingencies such as the resolution of pending seller litigation or other claims.

5. Confirmation of the parties’ authority to enter into the transaction, i.e. board or shareholder approval, waiver of restrictions under lending agreements or similar potential limitations.

6. Representations and warranties of the seller regarding the business. These representations may include:

a. That the company’s financial statements accurately reflect the historical operations of the business.

b. That the seller is not aware of any actual or threatened changes to the business’s historical operations.

c. That there are no undisclosed liabilities of the business which would materially impact its operations or value.

d. That the company has good title to its assets.

e. That all material contracts and obligations have been disclosed.

f. That there are no environmental liabilities related to the property.

g. That there are no undisclosed employment or labor related claims.

(The scope of these representations and warranties by the seller and the seller’s potential liability related to those representations, are often the subject of negotiation between the parties or their counsel in finalizing the terms of the definitive agreement.)

7. Conditions for closing may include:

a. Regulatory approval if required to complete the transaction.

b. Completion of the buyer’s due diligence and the buyer’s satisfaction with that due diligence review.

c. The finalizing of employment agreement and/or non-compete agreements with key employees of the seller.

d. Shareholder approval of the seller and/or the buyer.

e. Resolution of pending litigation, tax audits, insurance claims, or similar material contingencies.

f. Environmental surveys satisfactory to the buyer.

g. Satisfactory title work on the seller’s properties.

h. Buyer financing.

i. Lease of operating facilities.

j. Customer transition.

8. Post-closing matters. These items may include the escrowing of a portion of the sale price proceeds pending resolution of a contingent liability, detailed terms of post-closing earnout payments to the seller, or the escrowing of funds pending completion of a tax audit.

The definitive agreement ultimately outlines the details of the transaction. In some cases this agreement is executed well in advance of closing. While in others it may be subject to negotiation throughout the pre-closing process and only signed at closing.

Professional Services Disclaimer: Please note that the information presented here is as an educational service, and while it contains information about legal issues, it is not legal advice. No warranty is made regarding the applicability of the information presented to a particular client situation, and the information set forth is not a substitute for original legal research, analysis and drafting for a particular client situation.