Often, selling a company can be a lucrative decision for owners, and purchasing a company can help expand a business’s reach in the market or diversify its industries. An acquisition agreement is a critical contract when one company decides to purchase another company. Each merger and acquisition transaction will have unique terms and can vary widely from one another. It is essential to have a valid acquisition agreement that fully represents the terms of your particular deal.
Key Terms of an Acquisition Agreement
While each acquisition will differ from another, there are several key provisions that should always be included in the agreement. Such provisions include the following:
- Description of the transaction – What company is being acquired, the structure of the transaction, and payment schedule.
- Representations and Warranties- These are factual statements and assurances regarding the nature and quality of the business being acquired, including any potential risks of the acquisition. The buyer and seller will each desire different reps and warranties relating to their purchase or sale of the business.
- Conditions – Sets out everything that must occur before there is an obligation on the parties to close the deal.
- Covenants – promises by the parties that are to be fulfilled both before closing and/or after closing.
- Termination – How and when either party may end the transaction prior to closing and any consequences of walking away from the deal.
- Indemnification – Allocates certain amounts of risk and liability to the parties if there is a breach of covenants, warranties, or representations or a lawsuit relating to the potential merger or acquisition.
Of course, each provision will need to be carefully tailored to the specifics of each particular party and deal. If you are a party to an acquisition, you need to make sure that the acquisition agreement adequately and specifically protects your rights, limits your liability and risk as much as possible, and allows you recourse in the event of a breach.
Two Types of Acquisition Agreements
While there are many types of acquisition transactions, a deal will generally involve one of two main types of acquisition agreements – an entity purchase agreement or an asset purchase agreement. Companies may also seek a merger rather than acquisition, depending on the circumstances.
Entity purchase agreements – Also called stock purchase agreements, this type of agreements oversees an acquisition by which the purchaser obtains ownership by buying at least a majority of the company’s stock. Once they are the majority owner, the acquiring company assumes control of the company, including obligations and debts of the company.
Asset purchase agreement – In this type of arrangement, the purchaser buys all or some of the company’s assets. Such assets can include financial accounts, tangible property including equipment, real estate, and inventory, and intangible property such as trade secrets, patents, copyrights, or trademarks. The owners still retain ownership of the corporate shell even though there is no practical business anymore. This can be beneficial if a company is acquiring a sole proprietorship or partnership with no formal entity.
You should always seek advice and counsel from an experienced business attorney when determining the type of acquisition agreement you want and in drafting an acquisition agreement that fully protects your rights.
Consult with Our San Jose Startup Attorneys about Your Business
If you are thinking of selling your business, your first call should be to Startup Company Counsel. Our California startup and business lawyers can ensure you leave the transaction in the most beneficial position possible. Call 408-441-7555 or contact us online today.
