mergers + acquisitions accounting
In a previous blog we broke down due diligence and its role in helping business owners make informed decisions during a merger and acquisition [M+A] transaction.
After due diligence, what’s the next step?
Typically, the parties then enter a formal contract that documents the transaction. It’s crucial to ensure the sale agreement is well drafted to protect your interests and covers all important aspects of the transaction, such as a share purchase or an asset purchase agreement.
This blog outlines the key terms you need to include and the pitfalls to look out for.
what should be covered in the sale agreement?
1. the purchase price + related terms
There’s a common misconception that the purchase price is ‘just a number’. However, some of the most important aspects of the agreement to get right are the mechanics of:
- how the purchase price is paid
- what adjustments need to be made [to the number]
- any working capital contributions
It’s important to also consider what your position is regarding matters such as adjustments for employee leave entitlements and stock.
2. retention
One of the most important areas of the agreement [and often the most negotiated], is the retention clause [if applicable]. Retentions are used to ‘hold back’ a portion of the purchase price pending certain events happening or a warranty period expiring whereby the buyer has a form of guarantee for potential claims.
It’s important both parties consider the amount of any retention held and what the terms of retention are. Whilst it’s attractive for a seller to have a smaller retention, the buyer will push for a higher retention for as long as possible. Parties may negotiate to replace retention with additional seller warranties.
3. milestones + earn-out provisions
Document all transaction milestones, especially if you have agreed on an earn-out provision. Earn-outs typically consist of contingent, additional payments that can be made after certain milestones relating to future performance are achieved. These earn-outs expire at a specified date in the future.
The purpose of these earn-outs is to mitigate risk for the buyer, particularly where the future of a business is uncertain. There is, however, a risk of misrepresenting the buyer’s goals in an earn-out provision. Earn-outs should be carefully drafted with specific milestones and a clear formula or method for determining an earn-out.
4. special conditions
You may have agreed on special terms, perhaps you have a condition that must happen prior to completion. It’s important those terms are incorporated into the written agreement; including the details of when that condition must be satisfied by, and what happens if a party doesn’t comply.
5. the nature + extent of representations + warranties
Warranties and representations made either prior to agreement or formalised within your agreement are incredibly important to both the seller and buyer and should be carefully drafted.
From a seller’s perspective, it’s important these are qualified to the greatest extent possible and are only made with knowledge qualifiers.
Buyers should consider the important aspects of what they require and what warranties they need. Matters such as intellectual property, financial and liability representations and employees are often the focus.
6. restraints + non-competes
If you’re acquiring all the shares in a company or acquiring the whole business, it’s important to consider the terms of any restraint that is to be placed on the seller. Carefully draft restraints and non-competes to prevent the seller from competing with the buyer, or from contacting clients and employees for a specified period following completion. As a starting point, consider what’s really needed to protect the goodwill that the buyer is paying for.
7. disputes
Have you considered what happens if there’s a dispute under the agreement? Often, parties don’t consider what happens if there is a disagreement prior to completion. For example, the parties may disagree about the purchase price calculation. It’s important a carefully drafted dispute resolution clause is included in your agreement. This ensures there’s no ambiguity, and keeps the deal moving forward, even in the event of a dispute.
8. termination
So, you think you have everything covered and the parties are happily working towards completion… but have you considered what happens if a party cannot comply with their obligations under the agreement? Perhaps they fail to comply with a condition precedent, or they default at completion. In these circumstances, the agreement should carefully outline what happens, who is entitled to what, and what claims the parties may have against each other.
where things can go wrong
Problems often arise when parties have not considered what happens in specific scenarios, or when the agreement doesn’t reflect the parties’ true intent. Please note the above is not an exhaustive list of matters that should be considered, and each agreement should be specifically tailored to suit your needs.
we’re here to help!
When documenting your agreement, it’s important you contact an experienced lawyer to ensure your interests are protected. If you’re considering purchasing a business, business assets or shares in a company, get in touch with the team at businessDEPOT Legal via legal@businessdepot.com.au or give us a buzz on 1300BDEPOT to discuss how we can help you.
more handy info
If you’re thinking about selling or buying business assets, shares of other assets and you’d like to dig deeper into what makes a successful m+a transaction download our ultimate guide to m+a law below!
general advice disclaimer
The information provided on this website is a brief overview and does not constitute any type of advice. We endeavour to ensure that the information provided is accurate however information may become outdated as legislation, policies, regulations and other considerations constantly change. Individuals must not rely on this information to make a financial, investment or legal decision. Please consult with an appropriate professional before making any decision.
