In the process of an M&A transaction, buyers and sellers both need to come together to negotiate final deal documents. The M&A process has several steps and can take anywhere from 6 months to over a year to complete. Understanding the documents involved in the deal process helps accelerate the process and promotes well-rounded synergies between buyer and seller.
A non-disclosure agreement also referred to as a confidentiality agreement, is given by a seller to be executed by a prospective buyer prior to receiving a Confidential Information Memorandum (CIM) in a sale process.
Confidential Information Memorandum
A Confidential Information Memorandum (CIM), also known as the ‘book’, is used in a sell-side engagement to market a business to prospective buyers. It includes a detailed description of the business and its operations, a company summary and overview, financial information, deal structure, etc.
The Seller’s Agreement is a contract that allows a broker to reach out to buyers and make negotiations on your behalf. A seller’s agreement sets forth the terms and conditions of the broker’s payment and services. This agreement entails terms, exclusivity, compensation and more.
Letter of Intent
A letter of intent (LOI) is the term sheet that a buyer puts forward to a potential target laying out the purchase price, terms, and conditions governing the offer. The purchase price is often presented first. An LOI also must specify the transaction structure, including what percentage of the purchase price is being offered in cash and non-cash consideration, such as equity in the buyer, vendor take-back financing and earnouts, etc.
Purchase and Sale Agreement
The purchase and sale agreement (PSA) is the agreement that finalizes all terms and conditions in the buying/selling of a company as specified in the Letter of Intent. This final document is binding, and is usually completed after all buyer and seller due diligence has been finalized, as neither side can turn back once the agreement is finalized and executed.
In M&A transactions, sellers usually agree to remit buyers and their affiliates and representatives from any losses they incur as a result of the seller’s representations, warranties, and covenants contained in the transaction agreement.
To mitigate this risk, buyers often advise a trustworthy third-party agent to hold a portion of the purchase price sometime after closing. This establishes the mechanics for distributing funds, engagements, rights, obligations, and fees. Escrow arrangements are overseen by escrow agreements signed by both buyer and seller in an M&A transaction as well as a third-party escrow agent.
Transition Services Agreements
Transitioning after an M&A transaction can be difficult, hence to mitigate the challenges of transitioning, an acquired business to new ownership should be given the necessary support needed by the seller to the target company (for an agreed-upon period post-closing.) A transition agreement service establishes a standard performance by the seller as well as expectations given by the buyers. The agreement allocates liability and sets both buyer and seller up for a successful post-closing process.