Understanding M&A Deal Documents

In completing a transaction, buyers and sellers eventually need to come together to negotiate final deal documents. This happens surprisingly late in the process, but obviously is the final gateway to completing a transaction. The primary deal document most often takes the form of an Asset Purchase Agreement or a Stock Purchase Agreement. However, in most transactions, there are a variety of other documents as well, including but by no means limited to employment agreements, loan agreements and shareholder agreements.


Who Drafts the Deal Documents?

It is fairly typical for the buyer in lower middle market transactions to provide the first draft of the deal documents. Also, because the documents are somewhat expensive to create, buyers tend to want to make sure that any questions related to the transaction are answered before they commission attorneys to draft them. So, sellers probably won’t get draft documents until well after the financial due diligence has been completed.

It’s fairly easy to detect when a buyer shifts from the mindset of “we would like to do this deal” to “we are going to close this deal” by delivery of the documents. If the buyer is delaying delivery of the documents, then he is probably still trying to sort out one or more risks prior to committing his own team to the deal.

At this stage, a seller will want to bring in his or her M&A lawyer to assist with negotiating the final documents. This should be a lawyer who has expertise in completing the sale of companies – not someone who simply dabbles in the space.

What will be in the Purchase Agreement?

Depending on whether the transaction is structured as an asset sale (company is selling its assets to the buyer) or as a stock sale (owner is selling stock in the company to the buyer), the main document will be either an Asset Purchase Agreement or a Stock Purchase Agreement. While there are some fundamental differences between the two, they are largely similar.

The most notable portions of the purchase agreement include:
The Deal Terms (a description of what is being sold and the price), Representations and Warranties (and the corresponding Schedules to the Agreement), Covenants and Indemnities/Dispute Resolution

The Deal Terms

Usually, the first part of the purchase agreement includes a detailed description of what is being sold and what the terms of the deal are. This is where sellers see the parts of the deal they are most concerned with: what they are receiving in exchange for their company.

This is where they will also find any consideration in addition to cash that is included. It is not unusual for buyers to pay a portion of the sale price in the form of a note back to the seller, an earn out (a payment based on future performance of the company), or some amount of equity in the buying entity.

Representations and Warranties

The next section of the purchase agreement will include many pages of representations and warranties about every aspect of the business. This is really a risk sharing mechanism, and it is the way that the parties allocate risks, both known and unknown about the company.

As an example, a typical representation and warranty might say that the seller is not aware of any employment related disputes other than those listed on a corresponding schedule to the agreement. Then, the parties may allocate the risk associated with employment related disputes by having the buyer handle any known and disclosed disputes and any unknown and undisclosed disputes, but having the seller handle any undisclosed disputes that the seller should have known about.

Because the risks addressed in the representation and warranty provisions can in some circumstances be very meaningful, it is important to closely work with your attorney in identifying any items that should be disclosed on the schedules. The seller’s attorney will also be working hard to make sure that future risks associated with the company are appropriately shared.


The next portion of the purchase agreement will contain covenants. This is where sellers will find the parties’ agreements to do things at the closing or after the closing. For example, typical covenants include: the parties’ agreement to enter into an employment relationship at the closing, the parties’ agreement to enter into a stock holder agreement at the closing, seller’s agreement not to compete with the buyer for a period of time after the closing, and the parties’ agreement to cooperate on certain items after the transaction has closed.

Indemnities/Dispute Resolution

Finally, the purchase agreement will contain indemnities and dispute resolution agreements. This portion of the agreement will work hand in hand with the representations and warranties section described above.

Indemnities will address what happens if liabilities occur after the transactioncloses – whether they will be paid by the buyer, the seller, or shared in some way.

Purchase agreements also often include alternative dispute resolution provisions that address how disputes post sale will be addressed. These can include arbitration, mediation, or other mechanisms.

Michael Schwerdtfeger’s eBook “The Inner Workings of a Deal: Tips for a Successful Transaction” is now available for download on his website. Get your free copy here: http://mbsmergers.com/downloads/ 

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