By Rajnish Puri |

Part four of a four-part series.

In this four-part series on the subject of selling your business, I have shared with you, based on my experiences, the various stages an owner of a privately-owned business can expect to go through when considering an exit strategy.

As discussed earlier in this series, in the context of a simultaneous sign and close transaction, buyer and seller do not have a legally binding agreement between them until the execution of a definitive agreement, a moment that also coincides with the closing.  It is therefore important to solve, beforehand, the mystery of a definitive document. What does it contain? What do the provisions mean?  How does everything fit together? Before answering these questions, it is helpful to note that a business can be purchased and sold adopting different structures for the transaction – the primary three being a sale of shares, a sale of assets and a merger of entities.  Hence, the respective names for the definitive documents – a Stock Purchase Agreement, an Asset Purchase Agreement and an Agreement and Plan of Merger.  The focus of this conversation is on the first two, they being more common than the third.  Although a given document may have several provisions depending on the terms and structure, broadly speaking, both types of agreements can be categorized into four principal segments as follows.

Specifying What is Being Sold and Purchased.  The initial segment of an agreement typically describes, with adequate specificity, the items being sold and purchased at closing – shares, in a Stock Purchase Agreement and, assets, in an Asset Purchase Agreement.  While the description of the shares that are the subject of transfer is relatively straightforward, reaching an agreement on the assets being sold (or retained) often requires more extensive drafting.  Unlike a share transfer where title to the entity’s assets and liabilities remains unchanged, the agreement for the sale and purchase of assets is not just limited to the notion of a transfer – it also requires the parties to address the concepts of which assets and liabilities are retained by the selling entity as well as identifying the liabilities being assumed by buyer.  The actual instruments of transferring title are generally included as exhibits to the agreement.

Purchase Price and Related Nuances.  A substantial segment of an agreement is devoted to describing the amount and timing of the purchase price being paid for the shares or assets, and the contingencies that may lead to adjustments, both upward or downward, in the price.  Other than the amount – something that parties generally establish “firmly” in a Letter of Intent, despite its non-binding nature – almost every element of this section warrants careful consideration by both seller and buyer.  Of the aggregate purchase price, what portion is to be delivered at closing or how much buyer or a jointly appointed escrow agent may holdback for potential post-closing obligations of seller, are subjects typically addressed here.  In certain transactions, particularly those dealing with seasonality in the target business or involving historical swings in revenue streams, it is in this segment where one finds provisions on purchase price adjustments linked to agreed-upon working capital targets and additional payments, or “earn-outs,” contingent upon the target business attaining certain milestones under buyer’s watch.

Statements About the Business.     Labeled as “Representations and Warranties of Seller,” with the exception of “as-is” transactions, this segment ends up being, by far, the most negotiated portion of an agreement.  The section includes several statements from Seller about various aspects of the business, some qualified with materiality, knowledge or both, and many without such qualifiers. (There also is a separate section covering the representations and warranties of a buyer, which is limited to certain fundamental matters and rarely draws intense scrutiny.)  In explaining the primary purpose behind this section, a friend once quipped that, whereas the section dealing with the purchase price provisions describes what a seller would receive at closing, by contrast, this section essentially lays the groundwork for what a seller would have to return to buyer should seller’s statements later turn out to be untrue, subject, of course, to other terms and conditions found in an agreement. In other words, the provisions of this segment are important with potential for serious implications.  It is principally for this reason that counsel for both parties spend significant time negotiating the provisions of this section, with seller’s counsel motivated by limiting the scope of seller’s representations to ultimately limit buyer’s recovery post-closing (as discussed below). Naturally, buyer’s motivation is quite the opposite and counsel’s strategy is dictated accordingly.  An ancillary document associated with this section is the disclosure schedule, which contains information required pursuant to seller’s statements about the business and exceptions to the representations.

Post Closing Matters.   The last major segment of an agreement deals with matters relating to indemnification and restrictive covenants, although each appears in a separate dedicated section of its own.  The indemnification obligations are mutual between seller and buyer, but it is the seller’s that merit more attention.  The provisions deal with survival periods for the parties’ representations and warranties, scope of protections, limitations on liability and a description of procedures to be followed by the parties if problems were to arise.  With respect to the restrictive covenants, the document imposes on seller obligations to not compete in the target business industry and refrain from soliciting the employees or customers of the business being sold.  Finally, an agreement contains general provisions about methods of communication between parties, dispute resolution procedures, and the law governing the interpretation of the agreement, among other matters.

In Part One, Part Two and Part Three of this series, I shared thoughts on First Steps, Purpose of a Letter of Intent, and What Transpires after Signing the Letter of Intent, respectively.  Hope you found the discussion in this series helpful.  In my upcoming posts, I plan to share with the readers practical knowledge and trends on a variety of corporate finance topics applicable to early stage and established businesses. 

Thank you for joining us on ClarkTalk!  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.  You should certainly consult legal counsel of your choice when considering the sale or purchase of a business.  If you wish to consult with the author of this post or another attorney at Clark & Trevithick, please contact Raj Puri by email at or telephonically by calling the author at (213) 341-1322.


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