Question
What are the most contentious issues when negotiating a Purchase Sale Agreement?
Answer
There’s one issue that trumps them all. Do you remember the children’s game of hot potato, where the ball would get passed around from kid to kid and then the teacher would blow the whistle? Whoever had the hot potato on their lap was out, until there was one winner. In negotiating M&A transactions, from my perspective as the M&A lawyer, we are engaged in a game of high level hot potato. We are going to bounce risk back and forth and back and forth through the documents, and whenever we go to closing, that’s like the teacher blowing the whistle. So the most contentious issues usually are around allocation of risk. Who will assume what risk come time of closing. The seller, of course, wants to push as much risk off to the buyer and ask them to assume it. The buyer wants to keep the seller’s feet to the fire for as long as possible. I would say over 50% of the definitive purchase agreement has to do with this game of allocating risk.
Now there are other important issues such as price versus terms. I could agree to pay you $100 million for your company but if it’s $1 million a year for the next 100 years, that may not be acceptable to you, right? You’d like it to be $100 million in a lump sum. I’d like it to be $100 million over 100 years. So price versus terms, allocation or risks, these are the things most of the time is spent on. Everything else is usually a cousin of one of those two.
The last thing I would add is there’s a chunk in the agreement that just deals with all kinds of mechanics and logistics. You know, when do we close, conditions to closing, those are contentious but not nearly as contentious as the first two. If you had to break down the purchase agreement into three categories, it would be: allocation of risk, price and terms, and mechanics and logistics. Usually, it’s negotiated in exactly that order of the three buckets.
Now there are other important issues such as price versus terms. I could agree to pay you $100 million for your company but if it’s $1 million a year for the next 100 years, that may not be acceptable to you, right? You’d like it to be $100 million in a lump sum. I’d like it to be $100 million over 100 years. So price versus terms, allocation or risks, these are the things most of the time is spent on. Everything else is usually a cousin of one of those two.
The last thing I would add is there’s a chunk in the agreement that just deals with all kinds of mechanics and logistics. You know, when do we close, conditions to closing, those are contentious but not nearly as contentious as the first two. If you had to break down the purchase agreement into three categories, it would be: allocation of risk, price and terms, and mechanics and logistics. Usually, it’s negotiated in exactly that order of the three buckets.
Share this Q&A
Tags
Written by Andrew J. Sherman
Andrew J. Sherman is a Partner in the Corporate Department of Seyfarth Shaw LLP
Follow:
More Q&As from our experts
- What are important legal issues to consider in a Letter of Intent?
- What corporate governance changes can drive shareholder value?
- How do you value intangible assets in a business sale?
Related Terms
Related Articles
Sale Process
How Targeted Should Your Sale Process Be?
Sale Process
The Exclusive Negotiations Fallacy
Maximize Value
How Does Working Capital Impact the Value of Your Business?
Sale Process
Deal Structures Through the Eyes of an Acquirer
Term of the Day
Tombstones are grave-looking, simple print advertisements in black and white that are used to make an announcement....
Read Full Term
Subscribe To the Divestopedia Newsletter!
Stay on top of new content from Divestopedia.com. Join one of our email newsletters and get the latest insights about selling your business in your inbox every week.
Resources
- Q3 2020 SS&C Intralinks Deal Flow Predictor: The Work From Home Issue
- [Free Whitepaper] Q3 2020 SS&C Intralinks Deal Flow Predictor: The Work From Home Issue
- Free Webinar | M&A Transactions in Uncertain Times | Thursday, May 28, 2020 1:00 PM (ET)
- Upcoming Free Webinar | M&A Transactions in Uncertain Times | Thursday, May 28, 2020 1:00 PM (ET)
- Free Webinar | M&A Transactions in Uncertain Times | Thursday, May 28, 2020 1:00 PM (ET)
