How to Draft an Acquisition Agreement
Retain an attorney., Make contact with the business., Consider a non-disclosure agreement., Draft a letter of intent., Conduct due diligence., Choose an acquisition model., Negotiate the purchase., Determine payment structure., Draft the purchase...
Step-by-Step Guide
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Step 1: Retain an attorney.
Purchasing or merging with another business is very complicated.
You should consider hiring an experienced business attorney to help you at every step of the process.
An attorney can negotiate the terms of the deal, draft all of the legal documents including the purchase agreement, and finalize the deal.
If you are not interested in having an attorney for all parts of the acquisition process, you should at least consider hiring an attorney to review any materials that you draft.#*You can locate local attorneys and check to see if any grievances have been filed against those attorneys through state bar associations.
For a list of state-by-state bar association information visit: http://apps.americanbar.org/legalservices/findlegalhelp/home.cfm. -
Step 2: Make contact with the business.
When considering the purchase of a business, one of the first steps is to make contact with the business that you want to acquire so that you can see whether the business owner is interested in selling.
You also want to determine whether it is a sound business decision for the potential purchaser or seller.
There are several ways that a buyer can approach a potential business for acquisition, including:
Reaching out directly to the business owner and asking for a one-on-one meeting to discuss mutual opportunities.
This allows a potential buyer and seller to see whether there is mutual interest and the ability to work together.
A joint venture is considered by some to be a better way to initiate contact with a potential seller.
In this case, the potential buyer enters into an agreement(s) with potential business acquisitions to have a close look at the potential business and how it operates before acquiring it.
It also allows a potential seller to get a chance to see what it would be like to work with/for the acquiring company.
A potential buyer can also make contract through a third-party who contacts business owners to see whether they would be willing to sell.
This method allows a potential buyer to keep his or her interest in the acquisition of certain types of business hidden while making inquiries., If a company decides it may be interested in selling the business, it may be best if both the potential buyer and seller enter into a non-disclosure agreement (NDA).
This agreement would establish the parameters for confidentiality so that a potential seller could turn over business documents and a buyer would be required to keep them confidential.You can view a sample NDA related to an acquisition at: http://www.allbusiness.com/asset/2015/02/15.4-Confidentiality-Agreement-in-Connection-with-Merger-or-Acquistion.pdf. , A letter of intent is a non-binding agreement between both parties that outlines their intent to enter into an agreement, sets forth the exchange of information, and establishes a purchase price for the business.
These letters may also include a period of time during which the seller is restricted from attempting to sell the business to someone else., A buyer must make a comprehensive examination of the potential purchase, including all assets and liabilities, and potential for growth.
This examination is referred to as due diligence.
Generally, a prospective buyer should examine the following:
The reasons the company is selling and whether there were any previous attempts to sell the business.
The complexity of the business and evaluate how difficult it would be to take over the company.
The organizational structure of the company, including any regional offices, subsidiaries and employee reporting.
Employees, including identifying key employees and charting employee compensation.
Lawsuits, including employee injury and discrimination claims as well as lawsuits originating outside of the business.
All employee benefits including insurance, pensions plans, vacation and sick time.
Financial records, including financial statements, cash flow analyses, assets, liabilities, and expenses.
Business assets, including real estate and intellectual property.
Business structure, including shareholder agreements and/or equity partner agreements.For an extensive acquisition due diligence checklist visit: http://www.accountingtools.com/due-diligence-checklist.
Major contracts and leases to identify any potential problem. , An acquisition model is the way that a buyer intends to purchase a company.
Generally, there are two forms of acquisition, an entity purchase or an asset purchase.
In an entity purchase, a buyer purchases a majority of the company’s stock, assumes all debts and obligations, and becomes the new owner.
In an asset purchase, a buyer purchases all of a company’s assets including its real property (real estate, office equipment, etc) and intellectual property (copyrights, trademarks, patents, etc.).
The corporate structure remains in place even though someone else has purchased all of the company’s assets.
An asset purchase allows the buyer to begin depreciating the acquired assets immediately and therefore provides a tax benefit.
In an asset sale, the buyer is not responsible for the acquired business’ debts and obligations because it did not buy the business as a whole but only its assets.
This can be a benefit for a buyer.The seller prefers an entity purchase because they have to pay taxes at the long-term capital gain rate.
Using an asset sale for a C corporation will leave sellers at risk of double taxation- one for the shareholders and other for the corporate entity. , Once a buyer has completed the due diligence process, he or she may move forward with making a final offer on the business or choose to walk away.
If the buyer intends to move forward, he or she will draft a purchase agreement that is favorable to the buyer with the expectation that there will be negotiations with the seller until a final agreement is drafted and signed.
The purchase price is a critical component of the payment agreement and often an area of negotiation as both the buyer and seller will have different ideas about the proper value of the business.
As part of the purchase price, the buyer and seller will have to agree on the amount of working capital that is necessary to keep the business running through the completion of the sale.
Working capital may include inventory, accounts receivable and pre-paid items such as insurance or subscription services.
Sellers typically want to have an increased purchase price if the working capital is high, whereas buyers worry that sellers will not invest enough into the working capital since the sale is moving forward., A buyer rarely has enough capital to purchase a company outright with a lump sum payment.
Typically, the buyer has to line up his or her financing and determine the best way to acquire the company.
In an installment purchase, the buyer makes a significant down payment and then signs a promissory note.
The promissory note outlines the amount of the payments and how long the buyer will take to payoff the seller.
Some buyers, who have the resources or financing, will make a lump sum purchase.
Typically, a buyer will make a lump sum purchase if the seller requires full payment or offers a significant discount for full payment., An acquisition purchase agreement is the contract that specifies all of the elements of the acquisition, including a detailed description of the company, any representations and warranties made by the seller or buyer, a description of the purchase, and a timetable for completion of the acquisition.
Generally, a purchase agreement includes the following sections:
An introduction; Terms and definitions; Transaction description; Representations and warranties; Agreements regarding closing the deal; Signatures and exhibits.You can view a sample asset purchase agreement at: https://www.nysba.org/WorkArea/DownloadAsset.aspx?id=21370. , The introduction should briefly describe the transaction, the parties to the purchase and sale of the business, and the type of sale.
After the introduction, there is a “definitions” section that outlines all of the important terms used throughout the agreement.
The introduction does not typically carry any legal authority but is used merely to forecast the detailed agreement laid out in subsequent sections.
The definitions section is very important and does carry legal authority.
It outlines how terms such as “working capital” and “purchased assets” will be understood throughout the agreement.
Often both parties will carefully negotiate the wording of the definitions., This part of the agreement sets forth the purchase price for stock or assets, any adjustments to the purchase price, including adjustments for a lump sum payment, liabilities, and any funds placed in escrow.
This section would also outline any agreements made regarding working capital.
Parties should also agree as to how they will report the sale to the IRS., In this section, the seller sets forth any representations or facts about its business that the buyer is relying on.
Generally, the seller’s representations will address the following:
The legal status of the business and the seller’s authority to transact business on behalf of the company.
Statements about the quality of the assets being purchased and the operations of the business.
Financial and legal documents, including tax documents, financial statements, pending lawsuits, and environmental concerns.
Employee information, including retirement plans, employee information and other labor related information.
Statements by the purchaser regarding the financing and payments, his or her authority to enter into the contract, and the business’s structure and organization.
Typically, the section is a reflection of the due diligence process and includes information disclosed and confirmed., This sections sets forth the obligations of the buyer and seller in order for the deal to be finalized.
While the agreement may be negotiated up until the actual closing date, the parties can agree as to the date of closing and the documents that must be executed at the closing including:
The bill of sale; Any directors or shareholders agreements; Resignations of directors and officers; and Lease information specific to the closing transaction.
This section will also outline any agreements that will go beyond the closing date, including the protection of claims for breach of covenants or warranties., Both parties must sign and date the acquisition agreement and the document must include the proper spelling of the parties’ names and their titles., At the closing of the acquisition, the seller must provide all title documents for its assets, real estate, and any other property that the buyer is acquiring.
In an asset sale, title to property is transferred through a bill of sale that outlines all of the seller’s warranties and representations about the property, including any trademarks.
The agreement will also specify when the buyer is assuming the debts and obligations of the seller’s business.
For companies with boards or shareholders, title cannot be transferred until a board approves the sale and shareholders have the right to dissent., Buyers should require that the seller sign a non-compete agreement.
This ensures that the seller, after selling off the business, does not start a new business in direct competition with the acquired business.
The non-compete agreement should include the following:
A statement by the seller, whereby he or she agrees not to engage in any business that would compete with the buyer for a specified period of time.
An agreement by the seller not to solicit any of his or her former clients and a prohibition from the seller working with these clients for a certain amount of time.
An agreement by the seller not to solicit employees to leave the company.
An agreement to keep confidential information confidential.You can view a sample non-compete agreement at: https://www.rocketlawyer.com/form/noncompete-agreement.rl. , Many buyers and sellers will enter into an escrow agreement that specifies a certain amount of money that must be placed in an account at a bank.
This money is set aside as a protection for the buyer.
Typically, the funds may be used to pay for any obligations or the loss that the buyer suffered and for which the seller agreed to insure against.
The money may also be used to pay damages that they buyer suffered because of the seller’s breach of contract.You can view a sample escrow agreement at: https://www.nysba.org/WorkArea/DownloadAsset.aspx?id=21378 , After the acquisition, the buyer and seller have to jointly fill IRS Form 8594, Asset Acquisition Statement and file it with the tax returns for the year of sale. -
Step 3: Consider a non-disclosure agreement.
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Step 4: Draft a letter of intent.
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Step 5: Conduct due diligence.
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Step 6: Choose an acquisition model.
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Step 7: Negotiate the purchase.
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Step 8: Determine payment structure.
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Step 9: Draft the purchase agreement.
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Step 10: Write introduction and definitions.
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Step 11: Outline structure of transaction.
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Step 12: Draft warranties.
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Step 13: Write closing agreements.
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Step 14: Sign the purchase agreement.
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Step 15: Transfer title.
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Step 16: Consider a non-compete agreement.
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Step 17: Place funds in escrow.
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Step 18: File with IRS.
Detailed Guide
Purchasing or merging with another business is very complicated.
You should consider hiring an experienced business attorney to help you at every step of the process.
An attorney can negotiate the terms of the deal, draft all of the legal documents including the purchase agreement, and finalize the deal.
If you are not interested in having an attorney for all parts of the acquisition process, you should at least consider hiring an attorney to review any materials that you draft.#*You can locate local attorneys and check to see if any grievances have been filed against those attorneys through state bar associations.
For a list of state-by-state bar association information visit: http://apps.americanbar.org/legalservices/findlegalhelp/home.cfm.
When considering the purchase of a business, one of the first steps is to make contact with the business that you want to acquire so that you can see whether the business owner is interested in selling.
You also want to determine whether it is a sound business decision for the potential purchaser or seller.
There are several ways that a buyer can approach a potential business for acquisition, including:
Reaching out directly to the business owner and asking for a one-on-one meeting to discuss mutual opportunities.
This allows a potential buyer and seller to see whether there is mutual interest and the ability to work together.
A joint venture is considered by some to be a better way to initiate contact with a potential seller.
In this case, the potential buyer enters into an agreement(s) with potential business acquisitions to have a close look at the potential business and how it operates before acquiring it.
It also allows a potential seller to get a chance to see what it would be like to work with/for the acquiring company.
A potential buyer can also make contract through a third-party who contacts business owners to see whether they would be willing to sell.
This method allows a potential buyer to keep his or her interest in the acquisition of certain types of business hidden while making inquiries., If a company decides it may be interested in selling the business, it may be best if both the potential buyer and seller enter into a non-disclosure agreement (NDA).
This agreement would establish the parameters for confidentiality so that a potential seller could turn over business documents and a buyer would be required to keep them confidential.You can view a sample NDA related to an acquisition at: http://www.allbusiness.com/asset/2015/02/15.4-Confidentiality-Agreement-in-Connection-with-Merger-or-Acquistion.pdf. , A letter of intent is a non-binding agreement between both parties that outlines their intent to enter into an agreement, sets forth the exchange of information, and establishes a purchase price for the business.
These letters may also include a period of time during which the seller is restricted from attempting to sell the business to someone else., A buyer must make a comprehensive examination of the potential purchase, including all assets and liabilities, and potential for growth.
This examination is referred to as due diligence.
Generally, a prospective buyer should examine the following:
The reasons the company is selling and whether there were any previous attempts to sell the business.
The complexity of the business and evaluate how difficult it would be to take over the company.
The organizational structure of the company, including any regional offices, subsidiaries and employee reporting.
Employees, including identifying key employees and charting employee compensation.
Lawsuits, including employee injury and discrimination claims as well as lawsuits originating outside of the business.
All employee benefits including insurance, pensions plans, vacation and sick time.
Financial records, including financial statements, cash flow analyses, assets, liabilities, and expenses.
Business assets, including real estate and intellectual property.
Business structure, including shareholder agreements and/or equity partner agreements.For an extensive acquisition due diligence checklist visit: http://www.accountingtools.com/due-diligence-checklist.
Major contracts and leases to identify any potential problem. , An acquisition model is the way that a buyer intends to purchase a company.
Generally, there are two forms of acquisition, an entity purchase or an asset purchase.
In an entity purchase, a buyer purchases a majority of the company’s stock, assumes all debts and obligations, and becomes the new owner.
In an asset purchase, a buyer purchases all of a company’s assets including its real property (real estate, office equipment, etc) and intellectual property (copyrights, trademarks, patents, etc.).
The corporate structure remains in place even though someone else has purchased all of the company’s assets.
An asset purchase allows the buyer to begin depreciating the acquired assets immediately and therefore provides a tax benefit.
In an asset sale, the buyer is not responsible for the acquired business’ debts and obligations because it did not buy the business as a whole but only its assets.
This can be a benefit for a buyer.The seller prefers an entity purchase because they have to pay taxes at the long-term capital gain rate.
Using an asset sale for a C corporation will leave sellers at risk of double taxation- one for the shareholders and other for the corporate entity. , Once a buyer has completed the due diligence process, he or she may move forward with making a final offer on the business or choose to walk away.
If the buyer intends to move forward, he or she will draft a purchase agreement that is favorable to the buyer with the expectation that there will be negotiations with the seller until a final agreement is drafted and signed.
The purchase price is a critical component of the payment agreement and often an area of negotiation as both the buyer and seller will have different ideas about the proper value of the business.
As part of the purchase price, the buyer and seller will have to agree on the amount of working capital that is necessary to keep the business running through the completion of the sale.
Working capital may include inventory, accounts receivable and pre-paid items such as insurance or subscription services.
Sellers typically want to have an increased purchase price if the working capital is high, whereas buyers worry that sellers will not invest enough into the working capital since the sale is moving forward., A buyer rarely has enough capital to purchase a company outright with a lump sum payment.
Typically, the buyer has to line up his or her financing and determine the best way to acquire the company.
In an installment purchase, the buyer makes a significant down payment and then signs a promissory note.
The promissory note outlines the amount of the payments and how long the buyer will take to payoff the seller.
Some buyers, who have the resources or financing, will make a lump sum purchase.
Typically, a buyer will make a lump sum purchase if the seller requires full payment or offers a significant discount for full payment., An acquisition purchase agreement is the contract that specifies all of the elements of the acquisition, including a detailed description of the company, any representations and warranties made by the seller or buyer, a description of the purchase, and a timetable for completion of the acquisition.
Generally, a purchase agreement includes the following sections:
An introduction; Terms and definitions; Transaction description; Representations and warranties; Agreements regarding closing the deal; Signatures and exhibits.You can view a sample asset purchase agreement at: https://www.nysba.org/WorkArea/DownloadAsset.aspx?id=21370. , The introduction should briefly describe the transaction, the parties to the purchase and sale of the business, and the type of sale.
After the introduction, there is a “definitions” section that outlines all of the important terms used throughout the agreement.
The introduction does not typically carry any legal authority but is used merely to forecast the detailed agreement laid out in subsequent sections.
The definitions section is very important and does carry legal authority.
It outlines how terms such as “working capital” and “purchased assets” will be understood throughout the agreement.
Often both parties will carefully negotiate the wording of the definitions., This part of the agreement sets forth the purchase price for stock or assets, any adjustments to the purchase price, including adjustments for a lump sum payment, liabilities, and any funds placed in escrow.
This section would also outline any agreements made regarding working capital.
Parties should also agree as to how they will report the sale to the IRS., In this section, the seller sets forth any representations or facts about its business that the buyer is relying on.
Generally, the seller’s representations will address the following:
The legal status of the business and the seller’s authority to transact business on behalf of the company.
Statements about the quality of the assets being purchased and the operations of the business.
Financial and legal documents, including tax documents, financial statements, pending lawsuits, and environmental concerns.
Employee information, including retirement plans, employee information and other labor related information.
Statements by the purchaser regarding the financing and payments, his or her authority to enter into the contract, and the business’s structure and organization.
Typically, the section is a reflection of the due diligence process and includes information disclosed and confirmed., This sections sets forth the obligations of the buyer and seller in order for the deal to be finalized.
While the agreement may be negotiated up until the actual closing date, the parties can agree as to the date of closing and the documents that must be executed at the closing including:
The bill of sale; Any directors or shareholders agreements; Resignations of directors and officers; and Lease information specific to the closing transaction.
This section will also outline any agreements that will go beyond the closing date, including the protection of claims for breach of covenants or warranties., Both parties must sign and date the acquisition agreement and the document must include the proper spelling of the parties’ names and their titles., At the closing of the acquisition, the seller must provide all title documents for its assets, real estate, and any other property that the buyer is acquiring.
In an asset sale, title to property is transferred through a bill of sale that outlines all of the seller’s warranties and representations about the property, including any trademarks.
The agreement will also specify when the buyer is assuming the debts and obligations of the seller’s business.
For companies with boards or shareholders, title cannot be transferred until a board approves the sale and shareholders have the right to dissent., Buyers should require that the seller sign a non-compete agreement.
This ensures that the seller, after selling off the business, does not start a new business in direct competition with the acquired business.
The non-compete agreement should include the following:
A statement by the seller, whereby he or she agrees not to engage in any business that would compete with the buyer for a specified period of time.
An agreement by the seller not to solicit any of his or her former clients and a prohibition from the seller working with these clients for a certain amount of time.
An agreement by the seller not to solicit employees to leave the company.
An agreement to keep confidential information confidential.You can view a sample non-compete agreement at: https://www.rocketlawyer.com/form/noncompete-agreement.rl. , Many buyers and sellers will enter into an escrow agreement that specifies a certain amount of money that must be placed in an account at a bank.
This money is set aside as a protection for the buyer.
Typically, the funds may be used to pay for any obligations or the loss that the buyer suffered and for which the seller agreed to insure against.
The money may also be used to pay damages that they buyer suffered because of the seller’s breach of contract.You can view a sample escrow agreement at: https://www.nysba.org/WorkArea/DownloadAsset.aspx?id=21378 , After the acquisition, the buyer and seller have to jointly fill IRS Form 8594, Asset Acquisition Statement and file it with the tax returns for the year of sale.
About the Author
Andrew Kim
Specializes in breaking down complex pet care topics into simple steps.
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