Thinking of Acquiring a Business – What is the appropriate documentation to start?
Once you have identified a company or business you want to acquire, there are several alternatives for how to go about documenting the terms and conditions under which the transaction will be consummated.
This is often a good first step to test to see whether the parties agree on the basic terms of an acquisition. A Term Sheet is a summary of the major points:
- Identify the parties, describe what is being acquired, set the purchase price,
- Describe how it is to be paid, list other major conditions to consummating the transaction [such as a noncompetition agreement, consulting agreement, assignment of an existing major contract or lease, and obtaining financing], and
- Set a deadline for the transaction to be consummated.
What is usually not contained in a Term Sheet is the customary representations and warranties that appear in the definitive agreements. A Term Sheet is not binding and may not even be signed by the parties, but it is a good beginning to flush out “talking points” between buyer and seller.
Letter of Intent
If the parties are a little farther along in their negotiations, a Letter of Intent, also a summary form of agreement, should be entered into it. Also, considered to contain insufficient specificity to be binding, a Letter of Intent often contains two major provisions that are binding and important to the due diligence investigation necessary to come to a final agreement.
First Provision - The first of those provisions is a confidentiality covenant. Prospective buyers will want to obtain the financial statements, tax returns, and other proprietary, confidential information of the seller before the buyer commits to the transaction, and the seller should not provide that information unless the buyer has agreed to keep that information confidential and, in the event the deal falls apart, to return all confidential information to the seller.
Second Provision - The second binding provision, often referred to as a “standstill”, is an agreement by the seller and his broker not to attempt to sell, or to accept offers from others to purchase, the business for a period necessary for the prospective buyer to make an informed decision whether to purchase.
A prospective buyer will not want to spend the time and money necessary to evaluate the acquisition if it is still being marketed to others, so the seller should commit to take the business off the market for the period necessary for buyer to accomplish that, usually 60-90 days, depending on the complexity of the transaction.
The terms of either of these preliminary documents will be superseded by the definitive form of acquisition agreement, but parties may save time and money by taking these preliminary steps first.