Purchase Agreement

Question 1

• What are the 3 main purposes of a Purchase Agreement?

Answer 1

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)

Question 2

• What is the want of a seller in closing?

Answer 2

o To receive the purchase amount immediately

Question 3

• What are the concerns of a buyer on closing?

Answer 3

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

Question 4

• How do buyers normally protect themselves?

Answer 4

o Request a portion of proceeds to be held in escrow for some period

Question 5

• Why would a seller let you into the process if you LOI bid below the initial range in IOI?

Answer 5

o EBITDA and other quality of earning factors may have shifted
o Market size and other factors presented in CIM are inflated

Question 6

• What usually happens post LOI?

Answer 6

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

Question 7

• When do you use an APA vs SPA?

Answer 7

o SPA – When buying equity

o APA – When physically buying underlying assets

Question 8

• What is a final transition services agreement?

Answer 8

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

Question 9

• What is reps and warranties Insurance?

Answer 9

o Reduces the buyers risk in the event of a breach of any representations and warranties instead of relaying upon the escrow alone

Question 10

• What impact does rep and warranties insurance have on size of an escrow?

Answer 10

o Reduces the size of the escrow and overall dependence on it

Question 11

• What are the APA/SPA sections?

Answer 11

o	Definitions 
o	Purchase Price 
o	Covenants
o	Conditions to Close
o	Recitals
o	Reps and Warranties
o	Indemnification 
o	Termination

Question 12

• What is normally included in the Purchase Price section?

Answer 12

o Mechanics of purchase including exchange of stock/cash and funds flow

Question 13

• What is in the Reps and Warranties section?

Answer 13

o Contains all the facts that each party presents as true, creating a liability if the items prove to be untrue.

Question 14

• What is a “Rep”?

Answer 14

o An assertion of facts

Question 15

• What is a “Warranty”?

Answer 15

o A promise about the future

Question 16

• What is a disclosure schedule in an APA/SPA?

Answer 16

o Anything else you want to detail pertaining to reps and warranties. Agreed exceptions

Question 17

• What are covenants in an APA/SPA?

Answer 17

o Agreements to do or not to do certain things before or after the close of the deal

Question 18

• What is indemnification in an APA/SPA?

Answer 18

o Protection from sellers for breaches of seller reps and warranties

Question 19

• What are the critical terms we would see in an Purchase Agreement?

Answer 19

o	Best Purchase Price 
o	Equity Proceeds 
o	Working Capital Target 
o	Escrow 
o	Survival Date

Question 20

• What is the point of Equity proceeds?

Answer 20

o Mechanics of getting from headline Enterprise Value to Equity Value

Question 21

• What is the point of escrows?

Answer 21

o Held back amounts from proceeds to settle post deal buyer/seller issues
o E.g. purchase price adjustments

Question 22

• What is survival date?

Answer 22

o Date after which Reps and Warranties expire.

o Usually 12-18 months