What are the Essential Elements of a Purchase and Sale Agreement?

{3:30 minutes to read}   So you want to sell your business? Last time, I presented steps to consider when entering into a Merger & Acquisition transaction. I stated it’s common for buyer’s attorney to prepare the initial draft of the definitive purchase agreement (the Definitive Agreement) and for seller’s attorney to provide comments to the draft, but this is a guideline.

Whether you represent sellers or buyers, it’s crucial to understand the essential elements of a Definitive Agreement:

1.Representations and Warranties

These are statements of fact made by seller relating to the condition of the company and/or the assets being sold. The big concern here is allocating risk between buyer and seller. Determining the scope of the representations and whether some will be limited by “materiality” and/or to the “knowledge” of seller, can be subject to heavy negotiation. Representations may also be modified by schedules, which disclose exceptions to the representations. They should be re-evaluated immediately prior to closing to ensure their veracity not only at signing, but also when the deal closes.

2. Conditions to Closing

When there is a time gap between signing and closing, it may be because the due diligence process revealed the need to satisfy certain “conditions precedent.” These commonly include tax authority clearances; pay-offs and releases from bank debt; and consents from third parties (i.e. a change of control provision in a material contract). Because closing conditions depend on third party action, it’s imperative the Definitive Agreement is clear about what constitutes “satisfaction,” and includes a date-certain by which the parties can walk away if seller is unable to deliver and/or satisfy any conditions.

3. Covenants

Covenants are agreements made by the parties. These promises can relate to either the pre-closing or post-closing period. If there is a gap between signing and closing, buyer will want assurances of the absence of certain changes to the business during such period. Covenants can be affirmative, such as an agreement that the parties will negotiate in good faith to produce a joint press release describing the transaction. Covenants can also be restrictive. For example, buyers want to prevent sellers from establishing a new competitive business after closing, as this could impair the value of the company being sold. In addition to a non-compete covenant, a Definitive Agreement may restrict sellers (for a specified period, within specified geographic regions) from soliciting existing customers, suppliers or employees.

4. Indemnification

An indemnification clause is like an insurance policy. It’s a promise made by one party to cover any losses suffered by the other for a breach/violation of a representation, warranty or covenant. Because sellers want to limit their post-closing exposure, indemnification is typically subject to caps, baskets, and deductibles, and the survival period is often negotiated. Although representations reflect a specific moment in time, the survivability of the indemnity covenant varies. Claims of fraud may survive indefinitely and certain key representations (i.e. title and taxes) often survive for the applicable statute of limitations.

If you have any questions about these essential elements, please contact me.

Aimee B. Davis Law P.C. is committed to advising its clients and resolving issues relating to the legal and business matters that are important to them. If you have any questions, please feel free to contact us at (917) 617-2243 or email aimee@aimeebdavis.com.
Aimee B. Davis

Aimee B. Davis
Aimee B. Davis Law P.C.
122 Ashland Place
Brooklyn, NY 11201
www.aimeebdavis.com
aimee@aimeebdavis.com

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1 Response to What are the Essential Elements of a Purchase and Sale Agreement?

  1. Michael Davis says:

    Outstanding, very complete & clear statements yet concise too.

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