What are the most contentious issues when negotiating a Purchase Sale Agreement?

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Q: From your experience, what are the most contentious issues when negotiating a Purchase Sale Agreement?
A: 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.

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Written by Andrew Sherman
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Andrew Sherman is an M&A Partner at Jones Day. He focuses his practice on issues affecting business growth for companies at all stages, including developing strategies to leverage intellectual property and technology assets, as well as international corporate transactional and franchising matters.

He has served as a legal and strategic advisor to dozens of Fortune 500 companies and hundreds of emerging growth companies. He has represented U.S. and international clients from early stage, rapidly growing start-ups, to closely held franchisors and middle market companies, to multibillion dollar international conglomerates. He also counsels on issues such as franchising, licensing, joint ventures, strategic alliances, capital formation, distribution channels, technology development, and mergers and acquisitions.

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