Purchase & Sale Agreement Terminology (Part 2 of 2)

Purchase & Sale Agreement Terminology (Part 2 of 2)

This article is a continuation from Tuesday’s posting.

More definitions of certain terminology commonly found within a P&S Agreement:

Indemnification: Where one party (typically the seller) to an agreement reimburses the other (typically the buyer) for any losses they incur as a result of the transaction.

Post Closing Working Capital Adjustment: In a merger and acquisition transaction, a working capital adjustment typically represents a pre-determined amount of working capital the selling company must have on the books as of the closing date. If the actual amount is more than the pre-determined target amount, the purchase price is increased by the excess. If it is less, the purchase price is decreased.

Purchase Price: The total consideration paid to the target company and/or its shareholders by the buyer upon consummation of the transaction. The purchase price amount includes cash, debt assumed, seller notes and escrow amounts, and excludes non compete payments, earn-out payments, royalty payments, revenue sharing payments and other specified adjustments.

Representations and Warranties: Specific assurances in a purchase and sale agreement stating that certain statements are true. The purchase and sale agreement also includes specific remedies should assurances made turn out to be false or inaccurate

Rollover: The amount of equity retained by the selling shareholder(s) and is measured as a percentage of total equity of the new company and the dollar value of equity retained.

Seller Note: A note payable or loan to the shareholder(s) or owner(s) of a business provided in the sale or transition of a company by the buyer. Seller financing is typically used to bridge a valuation gap either where other forms of financing are not available or where a buyer desires to preserve the borrowing ability of the selling company for secured financing. Seller financing is typically unsecured and subordinated below all other debt.

Survival Period: The length of time (in months) after the closing date during which the representations and warranties must be true and the seller is responsible for indemnifying the buyer (e.g., claims by the buyer must be made on or before that date).

Structure (Transaction Type): The method in which the target and the buyer exchange value. The target sells either assets or stock, and the buyer provides consideration primarily in the form of either cash or stock. The parties could also merge by exchanging stock.

Terms with Special Legal Meaning: Double Materiality Scrape, Fair Presentation, In All (Material) Respects, Knowledge, Material Adverse Effect, Operation in Ordinary Course, Sandbagging, 10b-5 Full Disclosure, etc.

Final Comment:

Parties to a business acquisition are advised to seek the assistance of legal counsel who are trained and experienced in drafting and negotiating P&S Agreements.

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