Mergers and Acquisitions For Dummies (75 page)

Considering Requests for Additional Information

Instead of simply responding to request after request from a Buyer when I sell a company, I always provide a detailed list of due diligence items and tell the Buyer that we'll consider adding requests on a case-by-case basis.

Due diligence should focus on confirming material facts: the numbers, the ownership, the customers, the contracts, and so on. But what falls outside “material facts” can be a complicated matter. Each deal is different, of course, and although the due diligence list provided in the appendix is a comprehensive list, a particular Buyer in a particular industry may require additional items. Sellers should consider those requests from the Buyer. However, asking for sales and marketing materials from years ago is probably useless to the Buyer. Asking the Seller to construct a financial model or write a sales and marketing plan isn't appropriate. Seller should not do Buyer's work. If Buyer wants a financial model or sales and marketing plan, it's the responsibility of Buyer to create those documents.

To help gauge whether a request is appropriate and covers material facts, Sellers should ask a simple question: “How does this information help close the deal?”

If there's no clear answer to how the extra info helps close the deal, the request is likely busywork. Well-meaning busywork, perhaps, but busywork nonetheless. In this case, Sellers shouldn't be afraid to challenge the Buyer's request.

Buyers, make sure your advisors have all prior information from the offering document and any management meetings. Sellers quickly get ticked off if advisors ask for information previously provided.

Chapter 15

Documenting the Final Deal: The Purchase Agreement

In This Chapter

Putting the final purchase agreement together

Examining the parts of a purchase agreement

Looking at important representations, schedules, and exhibits

C
oncurrent with conducting due diligence (see Chapter 14), Buyer and Seller draft a purchase agreement to memorialize the deal. Although most documents during the M&A process are nonbinding (that is, generally unenforceable in a court of law), the purchase agreement is a final, binding document.

Exciting, isn't it?

In this chapter, I introduce you to the purchase agreement, what to watch for while writing and reviewing it, and what you should leave to your lawyer.

In most cases, the purchase agreement passes the baton from the investment banker, who negotiated the business deal, to the lawyer, who settles all the nits and gnats of the legal issues. Find a good attorney; you're going to have to trust that person!

Drafting the Deal

The purchase agreement is the final, binding contract between Buyer and Seller. In layman's terms: This is the deal. In written correspondence, the purchase agreement is often referred to as the SPA (stock purchase agreement) or the APA (asset purchase agreement).

The purchase agreement can seem like a large, cumbersome document, but most of the document is boilerplate legalese that's in most agreements. The following sections give you an overview of the writing and refining process.

Purchase agreements like verbs. For example, you don't simply write
sell
or
buy.
You write
sell, convey, assign, transfer and deliver
or
purchase, acquire and accept.
Be prepared for some very long and exacting sentences!

Writing the first draft

Purchase agreements don't float in the ether, alighting to terra firma after being summoned to memorialize a deal between Buyer and Seller. Instead, someone has to write the darn things! Although both sides contribute to writing the document, someone has to provide the first draft; conventionally, that's the Buyer, but in reality, either side can write the first draft of the purchase agreement.

In other words, Sellers shouldn't feel compelled to wait for Buyers to provide a draft of the purchase agreement. As with most legal documents, the side that writes the agreement usually has a leg up on the other side. In fact, you may want to have a draft of a purchase agreement written well in advance of signing a letter of intent (LOI — see Chapter 13). That way, your side can quickly claim the high ground by submitting the initial draft, and you cut down on how much you have to wade through someone else's work.

See, the side who writes the first draft sometimes (but not always) writes an incredibly one-sided document that the other side needs to spend an inordinate amount of time fixing, tweaking, and adjusting. That is, lawyers spend that time fixing, tweaking, and adjusting, and lawyers don't work for free (or even cheap). Submitting a draft that's fair and reasonable can help cut down on how long the refining process takes (see the following section) and reduce the associated legal fees.

Although I encourage Sellers to submit a draft, a highly motivated Seller may be wise to agree to use the Buyer's draft if the Buyer balks at the Seller's draft. In this case, the Seller needs to get the deal done and isn't in much of a position to try to force the Buyer's hand.

Redlining the initial draft

No matter who provides the initial draft, the next step in the writing process is something I call
redline ping pong,
where both sides send marked up (or
redlined
) versions of the purchase agreement back and forth as the lawyers work through as many issues as possible.

Keep an ear out for the term
turns,
which also describes the process of sending a redlined draft to the other side. You may hear something like “When will we see your turn of the purchase agreement?” in conversation with the other side.

Amazingly enough, redline ping pong often allows the lawyers to settle many of the legal issues in a purchase agreement. However, the lawyers invariably end up at loggerheads on certain issues, usually of the business variety; at this point, the deal-makers (investment bankers) need to reconnect to settle those remaining issues.

Don't let the lawyers play redline ping pong too much. Stay on top of their process; after you clearly see that they're unable to settle an issue, make sure the deal-makers speak or meet to settle the remaining open issues.

Navigating the Final Purchase Agreement

Purchase agreements are lengthy, detailed documents that can make your eyes bleed if you don't know how to read one properly. Seriously. They're dreadful.

Joking aside, knowing how to read a purchase agreement is as important as what's in the purchase agreement. It's a two-step process:

1. Review the document to make sure it accurately represents the main (and major) facets of the deal.

2. Take a deeper dive into the minutiae of the document.

For that in-depth review, you may want to rely on your attorney.

Defer to your lawyer for matters concerning legal issues. Most purchase agreements contain legal boilerplate that doesn't differ much from one document to the next. You need to pay attention to this legalese, of course, but leave it to your lawyer to deal with it.