Purchase Agreement Flashcards
• What are the 3 main purposes of a Purchase Agreement?
o Lays out the terms and structure of the purchase
o Outlines consequences which the seller is liable for if depiction of company was untruthful (Indemnification)
o Set up transaction signing details
o Sets out a way to claw back value if something unexpected happens (Indemnification)
• What is the want of a seller in closing?
o To receive the purchase amount immediately
• What are the concerns of a buyer on closing?
o To be protected in the event something goes wrong soon after the deal closes
o Ensure the seller has represented the business being sold accurately
• How do buyers normally protect themselves?
o Request a portion of proceeds to be held in escrow for some period
• Why would a seller let you into the process if you LOI bid below the initial range in IOI?
o EBITDA and other quality of earning factors may have shifted
o Market size and other factors presented in CIM are inflated
• What usually happens post LOI?
o On site diligence/ management – sort through key remaining items
o Final third-party reports – No surprises
o Update Memo and Models
o Negotiate
Asset Purchase Agreement (APA) / Sales Purchase Agreement (SPA)
Final Credit Agreement
o Working capital target/peg
• When do you use an APA vs SPA?
o SPA – When buying equity
o APA – When physically buying underlying assets
• What is a final transition services agreement?
o For carve out transactions
o A lot of functions will need to leveraged from HQ still for some time until sub can stand on own feet
• What is reps and warranties Insurance?
o Reduces the buyers risk in the event of a breach of any representations and warranties instead of relaying upon the escrow alone
• What impact does rep and warranties insurance have on size of an escrow?
o Reduces the size of the escrow and overall dependence on it
• What are the APA/SPA sections?
o Definitions o Purchase Price o Covenants o Conditions to Close o Recitals o Reps and Warranties o Indemnification o Termination
• What is normally included in the Purchase Price section?
o Mechanics of purchase including exchange of stock/cash and funds flow
• What is in the Reps and Warranties section?
o Contains all the facts that each party presents as true, creating a liability if the items prove to be untrue.
• What is a “Rep”?
o An assertion of facts
• What is a “Warranty”?
o A promise about the future
• What is a disclosure schedule in an APA/SPA?
o Anything else you want to detail pertaining to reps and warranties. Agreed exceptions
• What are covenants in an APA/SPA?
o Agreements to do or not to do certain things before or after the close of the deal
• What is indemnification in an APA/SPA?
o Protection from sellers for breaches of seller reps and warranties
• What are the critical terms we would see in an Purchase Agreement?
o Best Purchase Price o Equity Proceeds o Working Capital Target o Escrow o Survival Date
• What is the point of Equity proceeds?
o Mechanics of getting from headline Enterprise Value to Equity Value
• What is the point of escrows?
o Held back amounts from proceeds to settle post deal buyer/seller issues
o E.g. purchase price adjustments
• What is survival date?
o Date after which Reps and Warranties expire.
o Usually 12-18 months
