The last step of an M&A process is known as the sale and purchase agreement or SPA. It’s time to finalize the agreement and sale price of the firm once a buyer has completed the entire due diligence process and evaluated the company’s current condition for sale. In order to include all of the terms and conditions of the transaction, this document will be formalized into a public deed and finally presented before a notary.
The buyer and its legal counsel are often in charge of creating the initial SPA. There are, however, some exceptions, such as how auctions operate. The participants are given a draft in this situation and will finally return it with their changes and offers.
Excellent care and attention must be taken when creating the SPA. A paragraph in the contract can make the difference between a successful or failing deal. The optimum situation at this point is to receive guidance from a knowledgeable counsel. From one with a track record of success in structuring contracts for business acquisitions. In light of this, the SPA is not a straightforward contract. In actuality, it is complicated.
Find out more about the documentation required during a sale here.
In light of this, the contract of sale is not a straightforward document; instead, it is incredibly intricate. The most common query is: What information should be in the contract? A variety of assets and obligations, connections, current contracts, etc., are all integrated into the document. As a result, the sheer volume of pages in the first version of the document overwhelms many business owners. The critical components of the contract for a business sale are covered in this article.
What is contained in the company SPA?
1. Description of the transaction
This section describes the transaction, such as the sale of assets or a business. It is crucial to clearly and concisely express each person’s true intentions by utilizing straightforward language.
When selling assets, it is important to be specific about the pertinent assets and liabilities transferred in the transaction. It will also be specified whether any property that the seller regularly uses, like a car, a parking space, or even their home, is excluded from the sale.
If the transaction involves the sale of stocks and shares rather than assets, a section describing the specific items being sold is included (for example, all the stock or only a specific number of shares). When numerous firms and shares of those companies are involved, the boundaries of the transaction are further defined in great detail.
2. Terms of the sale and purchase agreement
The price is the first significant aspect that is mentioned in the document, along with the conditions that go with it. These conditions include:
- Payment methods.
- Forecasts of deferred payments.
- Variable payments based on the achievement of goals.
- The payment currency.
- Events that will result in price adjustments. Since the final price will be based on the balance at the closing date of the agreement.
Although it is not necessary for this specific transaction, the contract additionally specifies whether the surplus cash is included in the deal or given to the seller as dividends.
If you are considering including an earn-out clause in your payment methods, here is everything you need to know: Payment methods in the sale and purchase of a company: the earn-out clause
3. Representations and warranties of the sale and purchase agreement
On the one hand, the seller promises that the business’s circumstances are true and correct. The following are some of the events that the seller must vouch for:
- The company is owned by the undersigned, and they have the power to make the sale and enter into the contract.
- They do not violate any law or other previous contracts.
- The company has such a number of shares.
- Copies of the articles of association have been delivered to the buyer.
- The financial statements are correct.
- The company has not substantially changed its operations since the due diligence.
- All tax payments are up to date and correct.
- You own the patents and trademarks.
- There are no outstanding lawsuits against the company.
- No hidden liabilities.
The damage, inconvenience, or loss caused by faulty, false, or untruthful information may be made up to the company’s buyer. This is taken into account while creating liability warranty conditions.
For the retention of a portion of the purchase price or the deposit of that portion, a bank account known as an escrow account is often formed as well. In other circumstances, a simple bank guarantee is accepted.
On the other hand, the company’s contingencies that are already included in the price are described so that (once the buyer knows these contingencies before paying the price) the seller is exonerated with respect to the damages or claims that these contingencies may cause to the buyer. In many cases, a price is put on these contingencies.
When the operation is based on the pre-closing balance sheet, and the data will be adjusted after closing, the representations and warranties will most likely cover the interim period between the two balance sheets.
Important information to consider
Be mindful of the following:
- Any other associations, relationships, or beneficiaries between the sale subject and third parties.
- Any disputes or claims by third parties.
- Any loans or credit on the subject of sale.
- If a warranty is of particular importance, it may also be necessary to ask all other shareholders to make it explicit.
- Any conflict of interest.
- A breach of statements made in this section will result in a breach of contract and liability for the party at fault.
4. Limitations on Responsibility
Usually, the seller’s liability for obligations to the Treasury, Social Security, or third parties is restricted. There are deadlines for filing responsibility claims, except for circumstances involving taxes, employment, social security, or administrative contingencies, where the deadlines correspond with the legal deadlines.
To prevent any minor disputes, the contract typically establishes a minimum level of responsibility over which the seller’s accountability can be discussed. The sum for each transaction will depend on its magnitude and be determined by how comfortable the parties are with the agreement’s structure.
5. Conditions of the sale and purchase agreement
Non-compete clauses are one of the terms of the sale and purchase contract. These provisions are meant to stop the seller from starting a competing business and stealing your clients. It assists in safeguarding the reputation of the business.
Sometimes, a contract of sale is made with the understanding that certain conditions must be completed before closing, such as acquiring approvals, contract assignments, or the seller performing specific tasks beforehand (the sale of a plot of land or its appropriate legalisation in the corresponding register).
The contract’s annexes are a section with legal significance. Some of them are due diligence, financial statements, patents, and certificates of compliance with the Treasury and the Social Security Administration.
ONEtoONE Sell-side services
Selling a company can be a frustrating and long process. The experience advisors of ONEtoONE could guide and support you during the whole sale procedure, making the maximum value out of the firm and finding the buyer that can pay the most, wherever they are. Find out more about our sell-side services.
If you are considering selling your company prior to the purchase contract, you will have to go through different stages that will help you maximize the final price. These steps can be decisive for the future of the company. If you need the guidance of a reliable team during the process, do not hesitate to contact us.