by Samantha ChanUnderstanding the “Fine Print” in Business Acquisition Contracts
Buying or selling a business involves much more than just agreeing to a purchase price. A purchase and sale agreement may be dozens of pages long, accompanied by schedules, exhibits, and other closing documents. Understandably, business owners often focus on the provisions that seem most important: What is being sold? How much is being paid? When is closing?
But some of the most consequential provisions may appear in the sections that look like legal “fine print.” These terms are not simply boilerplate. They allocate risk between the parties and can determine what happens if, after closing, one party discovers that the circumstances were not quite what was expected. Here are some examples:
Representations and Warranties.
Representations and warranties are statements made by one party to the other about particular facts or circumstances.
In a business acquisition, a seller may be asked to represent and warrant, for example, that it has authority to enter into the transaction, owns the assets it is selling, has disclosed pending litigation, is in compliance with certain laws, or has accurately identified its material contracts. A buyer may likewise be asked to represent and warrant that it has authority to enter into the transaction and has the ability to perform its obligations under the agreement.
Before signing, a party should understand not only whether a representation sounds generally accurate, but also exactly what facts the contract requires each party to stand behind.
Disclosures.
Disclosures identify facts, circumstances, obligations, or potential issues that the parties should know about before completing the transaction. What needs to be disclosed will depend on the business and the structure of the acquisition. Disclosures may relate to the business itself, its property or assets, or the individuals involved in the transaction. For example, they may identify existing leases, customer or vendor contracts, loans or other debts, liens, pending claims or litigation, employee obligations, licenses, intellectual property, or other commitments that could affect the business after closing.
Before signing, a party should understand what information is required to be disclosed, and whether the terms of the transaction have been negotiated in light of those disclosures.
Releases.
A release generally involves one party agreeing to relinquish certain claims or actions against the other. The scope can vary considerably.
Some releases are narrow and apply only to claims arising from a specific agreement or dispute. Others are drafted broadly to cover known and unknown claims arising before a particular date. A release may also identify additional persons or entities who receive its protection, such as affiliates, owners, officers, employees, agents, successors, or assigns.
Before signing, a party should understand who is being released, what claims are being released, what time period the release covers, and whether any claims or obligations should be expressly excluded.
Indemnification.
Indemnification provisions allow the parties to negotiate in advance who will bear those risks, and under what circumstances. These provisions may also limit losses, have thresholds, or lay out the procedure that needs to be followed if a claim arises. In a business acquisition, indemnification is particularly important because some problems may not become known until after the transaction has closed.
Before signing, a party should understand what claims or losses are covered under the contract, who will be responsible if a loss occurs, and what procedures, limitations, or remedies may apply to an indemnification claim.
The fine print is part of the deal.
While many business contracts contain provisions that may seem like “standard” contract language, that does not mean those terms are necessarily the best fit for you or your business. Just because a provision is common does not mean that it’s not negotiable.
The goal is not to eliminate or identify every possible risk in a contract—that is rarely possible. The goal is to identify the risks that matter, understand who is assuming them, and make deliberate decisions about how those risks should be handled.
Lewicky, O’Connor, Hunt & Meiser attorneys are experienced in helping buyers and sellers navigate business acquisitions, including drafting and reviewing purchase agreements and related schedules, negotiating the allocation of risk, and helping clients understand the terms and obligations they are actually agreeing to.
Before you sign, make sure you understand the fine print.
