On December 9, 2015, Attorney Stefan Cencarik, a Boston area business lawyer, discussed the importance and benefits of a Letter of Intent during any business or asset sale / acquisition. The next step following the Letter of Intent is for the parties to enter into a formal purchase and sale agreement. Unlike the Letter of Intent, the purchase and sale agreement will be a binding legal obligation and commits the parties to consummating the transaction. The essential terms of the purchase and sale agreement will include provisions for price and deal structure; due diligence and inspection deadlines and contingencies; liabilities and clearing of liens; and other expectations of the parties for issues to be resolved prior to closing.
What types of issues should a party be aware of prior to entering into a purchase and sale agreement?
First, the Buyer will want to ensure that there are sufficient provisions that will allow it to exit the transaction without losing any deposits or facing any legal liability for breach of contract. It is all too common during a business or asset sale that the parties make limited disclosures during the negotiation process, or the Letter of Intent does not completely address all deal issues. For example, the business to be acquired could be embroiled is a discrimination lawsuit with a former employee, or a creditor of the business has an "all asset" UCC-1 lien. These are liabilities that must be discussed, analyzed and/or resolved prior to closing. It may be that the Buyer does not want to undertake responsibility (or financial liability) for the lawsuit, or the creditor holding the lien is unwilling to negotiate or collateralize its lien. In those instances, a Buyer would benefit from provisions that would allow it to walk away from the deal.
Second, the Buyer will want to perform all forms of due diligence, however, the most importance due diligence during any transaction involves the books and financial records of the business. The Buyer will require unrestricted access to all financial information, such as tax returns, audited financial statements, profit and loss statements, ledgers, bank statements, accounts receivable and payable schedules, and other contracts, such as real estate and equipment leases, intellectual property licenses, and the like. In some transactions, the Buyer will be able to exit the deal if the books and records do not confirm to the early representations about the financial health and prospects of the business.
Third, the Buyer and Seller will want to specify the representations and warranties that they desire to survive the closing. Typically, representations and warranties provided to each of the parties will terminate as soon as title, ownership, and possession changes hands and the consideration is exchanged. At times, parties will insist that any representations concerning the accuracy of the financial reports survive the closing to provide a purchaser with a legal remedy against the seller.
Fourth, dispute resolution must be on the minds of both parties. What are the contingencies if the deal falls apart, if one party walks away, or if there is a breach of the purchase and sale agreement? Do the parties want to reserve all rights to file a state court lawsuit at the outset, or is it in the interest of the parties to mediate, and, if necessary, arbitrate the dispute? In this instance, it is in all parties interest to put in place provisions that prevent the escalation of minor and major disagreements into a state court lawsuit. In other words, the parties can agree to liquidated damages, forfeiture of certain payments or property rights, or put in place mandatory demand and notice, mediation, and arbitration clauses. This will help both businesses avoid the time and costs associated with a lawsuit.
These are only four of the numerous potential deal issues and contractual provisions that should appear in any purchase and sale agreement. For your next purchase and sale agreement it is recommended that you contact an experienced Boston area business lawyer to ensure that your rights and interests are protected. The investment in a business attorney far outweighs the financial risks and liability associated with a poorly drafted or incomplete business or asset purchase and sale agreement.