CHAPTER 20 Negotiating the Purchase Agreement Flashcards
(27 cards)
When should you begin drafting the asset purchase agreement?
After completing the most important confirmatory due diligence.
Who creates the initial draft of the asset purchase agreement?
The buyer’s attorney.
What follows the buyer’s initial draft of the agreement?
The seller’s attorney provides a marked-up version, initiating negotiation.
What do the appended schedules to the purchase agreement include?
Third-party contracts, financials, payroll, litigation, physical assets, etc.
What is the function of your acquisition entity?
It legally acquires the business, borrows funds, issues equity, and limits liability.
What are three entity forms in the U.S. that offer limited liability and single taxation?
LLCs, LPs, and S-corporations.
Why is an LLC commonly used for acquisitions?
Due to its ease of formation and structural flexibility.
What is a “step-up” in tax basis and why is it beneficial?
It revalues assets to purchase price, allowing tax deductions over time.
Why should buyers negotiate the appraisal terms in advance?
Because tax rate implications differ for asset types and affect both buyer and seller.
What limitation often arises with C-corporations regarding a step-up?
Sellers face high taxes, making step-up unattractive or unworkable.
What are representations and warranties in the purchase agreement?
Seller statements disclosing company status and giving grounds for buyer claims.
What is a knowledge qualifier in representations and warranties?
Language like “to the best of seller’s knowledge,” which limits liability.
What are escrows and setoffs used for in acquisitions?
To hold back funds for future claims and reduce risk to the buyer.
What are the four key negotiated terms around escrows and setoffs?
Size, survival period, basket, and cap.
What is a typical escrow size as a percentage of the purchase price?
20–30%.
What is a typical survival period for claims post-acquisition?
12–18 months.
What does the “basket” in an escrow agreement refer to?
The minimum claim amount required before funds can be drawn.
What is the purpose of a cap in indemnification terms?
To limit the seller’s total financial exposure to claims.
What are the typical terms of a seller note?
Amount, interest rate, and amortization, formalized in the agreement or a separate note.
How is working capital typically handled at closing?
Estimated at closing, then finalized later, with adjustments via escrow.
What happens if final working capital is below the target?
Funds are returned to the buyer from escrow.
What is the purpose of noncompete agreements?
To prevent the seller from competing with or harming the acquired business.
What are the three main clauses in noncompete agreements?
Noncompetition, confidentiality, and nonsolicitation.
What is the typical length of a seller transition period?
1–3 months full-time, followed by a year of consulting.
