Anatomy of an M&A Purchase Agreement | Complete Guide

by Jacob Orosz (President of Morgan & Westfield)

Executive Summary

General Structure of the Purchase Agreement

The purchase agreement details the final terms of an acquisition, so understanding its features is critical to a successful M&A transaction.

There is no standard layout or format for a purchase agreement. I have identified the primary clauses and sections that most contain, but they may appear in a different order, combined or separated, in yours.

Generally, the purchase agreement can be broken down into the following major sections: 

1. Preamble and Recitals
2. Definitions
3. Description of the Transaction
4. Purchase Price and Consideration
5. Representations and Warranties
6. Indemnification
7. Covenants
8. Conditions
9. Termination
10. Miscellaneous Provisions

How the Legal Structure Changes the Transaction

Purchase agreements take the form of an asset sale, stock sale, or merger. How the transaction is structured for legal purposes will impact the type of purchase agreement that’s used.

Sections of the purchase agreement:

Section 1: Preamble and Recitals

• Preamble: Most purchase agreements start with a section known as the Preamble. This section provides the reader with an overview of the context of the agreement. It usually names the agreement, introduces the parties, and sets forth the effective date of the contract. 
• Recitals: Immediately after the preamble, the purchase agreement often contains a series of statements beginning with the word “Whereas,” which are known as the Recitals. While the Recitals are generally not meant to be binding on the parties, they lay out the parties’ intentions and provide context to anyone attempting to interpret the purchase agreement.

Section 2: Definitions

This section is an alphabetical list of definitions of the key terms used throughout the document. Anytime a defined term is used in the purchase agreement it is usually capitalized, such as Assets, Assumed Liabilities, Balance Sheet, Basket, Best Efforts, Bill of Sale, Bulk Sale Laws, Business, and so on. 

Section 3: Description of the Transaction

The next section commonly describes the transaction at a high level, such as whether it will be structured as an asset sale, stock sale, or merger and what assets and liabilities are included in the purchase price. If it’s structured as an asset sale, it’s important to list the assets and liabilities included in the purchase price. Excluded assets should also be listed, including furniture. If the transaction is structured as a stock sale, the type and number of shares should be listed. A detailed list of assets is usually included in the appendix. Mergers are often used if there is a large, diverse set of shareholders, so this is a less common transaction type in the lower middle market.

Section 4: Purchase Price and Consideration

This section defines the amount of the purchase price and how it will be paid, also known as the consideration. This is usually the first significant clause in the purchase agreement. The Consideration clause describes how and when the purchase price will be paid, whether as cash, seller note, stock, earnout, or escrow/holdback, and in what proportions. 

• Adjustments to the Purchase Price: This clause discusses any adjustments made to the purchase price, such as prorations for changes in net working capital. The purchase agreement usually includes a net working capital target or a minimum amount of working capital that must be delivered at closing. If the amount of working capital delivered differs from this amount, then the purchase price will be adjusted.
• Other Clauses: This section may also include Inventory, Closing Costs, etc. 

Section 5: Representations and Warranties

Representations and warranties are statements and guarantees made by the parties related to the transaction, and comprise a significant portion of the purchase agreement. Called “reps and warranties” for short, they are heavily negotiated and used by many buyers to force the seller to disclose all material facts about the business and flush out potential problems. If the seller doesn’t disclose material facts, chances are the buyer will discover them after the closing and will then be entitled to pursue the seller for damages. 

Section 6: Indemnification

The Indemnification clause requires the parties to indemnify one another for breaches of reps, warranties, covenants, and other types of claims that may arise, such as those related to tax, the environment, or employee issues. The Indemnification clause, sometimes called a Hold Harmless clause, functions like an insurance policy and requires the breaching party to reimburse the other for all expenses resulting from a breach. In most M&A deals, 10% to 20% of the purchase price is withheld by a third party in an escrow account to fulfill any post-closing indemnification obligations.

• Common Disputes: Examples of potential disputes include inaccurate financial statements, violations of post-closing covenants such as non-competes or NDAs, tax claims, loss of key employees, and undocumented employees.

Section 7: Covenants

Covenants are agreements to take certain actions (an affirmative covenant) or not to take them (a negative or restrictive covenant). Covenants can govern the actions of both parties before the closing (pre-closing covenants) or after (post-closing covenants) regarding ordinary operations, access to the business, exclusivity, funding the sale, etc. 

Section 8: Conditions

If the purchase agreement is signed before closing occurs, it will also contain conditions, or contingencies, that must be satisfied before the closing can take place. These conditions may include the buyer obtaining financing, obtaining a license, transferring a lease, or obtaining franchisor approval. 

Section 9: Termination

Termination provisions outline how, why, and when parties can terminate the deal. This section is only necessary if the purchase agreement is signed prior to the closing. It includes conditions for canceling the agreement and penalties for defaulting, such as a break-up fee for the terminating party, or obligating one party to reimburse the other’s expenses. 

Section 10: Miscellaneous Provisions

This section includes general provisions you would expect to see in most legal agreements, including attorney fees, a note on the governing law, mediation, severability, etc. 

Ancillary Agreements and Closing Deliveries

While not essential to the deal, certain additional agreements help bring everything together in a structured way, and help you plan and and consummate the transaction. These include the Bill of Sale, Employment and Consulting Agreements, Corporate Resolution, Deed of Sale, List of Titled Property, Training Log, etc.

Introduction

One of the last steps of the M&A process is preparing the purchase agreement. A far more detailed version of the letter of intent, the purchase agreement replaces any prior agreement and includes all of the agreed terms and several newly negotiated ones. 

The purchase agreement also governs the transaction once it closes, setting forth the final terms for executing the deal.

The sheer size of the first draft overwhelms most sellers. But there’s no reason to be intimidated. With this guide in hand and your M&A attorney negotiating on your behalf, you’ll have a thorough understanding of what to expect and which clauses to pay special attention to.

General Structure of the M&A Purchase Agreement

The purchase agreement can be broken down into the following ten sections:

1. Preamble and Recitals
2. Definitions
3. Description of the Transaction
4. Purchase Price and Consideration
5. Representations and Warranties
6. Indemnification
7. Covenants
8. Conditions
9. Termination
10. Miscellaneous Provisions

There’s no single, standard layout or format for a purchase agreement. I’ve identified the main clauses and sections that most contain, but they may appear in a different order, combined or separated, in yours.

How the Legal Structure Changes the Purchase Agreement

A major consideration in every deal is whether it’ll be structured as an asset sale, stock sale, or merger. How the transaction is structured for legal purposes impacts the type of purchase agreement that’s used. Regardless of the form, the contract contains several clauses that remain the same across all scenarios, while the legal structure changes certain other clauses.

Legal Structure 1: Asset Sale

How an Asset Sale Works

In an asset sale, the buyer purchases the individual assets of the business directly from the seller. An Asset Purchase Agreement (APA) transfers ownership of those assets, while the seller retains ownership of the entity. The buyer merges the assets into their existing company or forms a new one to acquire the assets. The buyer only inherits liabilities they explicitly agree to in the purchase agreement. 

Why do buyers prefer an asset sale?

Most buyers prefer an asset deal due to the lower risk. The majority of transactions in the lower middle market are structured as asset sales since there is less possibility of the buyer inheriting unknown liabilities.

Most deals in the lower middle market are structured as asset sales due to the lower possibility of the buyer inheriting unknown liabilities.

Legal Structure 2: Stock Sale

How a Stock Sale Works

In a stock sale, the buyer purchases the shares of the entity (corporation or LLC) that owns the assets of the business. By purchasing the shares, the buyer assumes ownership of the entity’s assets and liabilities. As a result, a Stock Purchase Agreement (SPA) must be more comprehensive than an Asset Purchase Agreement and the buyer bears more risk. 

Shares in an LLC are technically called membership interests. For the sake of simplicity, most parties refer to the transaction as a stock sale. 

How common are stock sales?

Many larger transactions are structured as stock deals, while the majority of smaller deals are structured as asset sales.

Legal Structure 3: Merger

How a Merger Works

In a merger, two separate entities are consolidated into one legal entity. Mergers are created at the state level by filing a Certificate of Merger with the secretary of state. There are several different types of mergers, such as a reverse triangular merger and a forward triangular merger. 

How common are mergers?

Mergers are rare in the lower middle market. They’re most common when a company is acquiring a target with a diverse base of shareholders. A stock sale would require the buyer to purchase individual shares from each stockholder, which can be a cumbersome process. This is why, if there are a lot of shareholders, the deal is usually structured as a merger since it doesn’t require the consent of each shareholder.

Section 1: Preamble and Recitals

Preambles in Purchase Agreements

Most purchase agreements start with a section known as the Preamble. This section provides the reader with an overview of the context of the agreement. It usually names the agreement, introduces the parties, and sets forth the effective date of the contract. 

Here is a sample preamble:

This Purchase Agreement (this “Agreement”) is made and entered into as of January 1, 20xx, by and between:

Seller, a company duly incorporated and existing under the laws of Delaware; and

Purchaser, a partnership formed in Delaware.

The Seller and the Purchaser are herein referred to each as a “Party” and collectively as the “Parties.”

Recitals in Purchase Agreements

Immediately after the preamble, the purchase agreement often contains a series of statements beginning with the word “Whereas,” which are known as the Recitals. While recitals are generally not meant to be binding, they lay out the parties’ intentions and provide context to anyone attempting to interpret the purchase agreement.

Here are some sample recitals:

“Whereas, as of the date of this Agreement, the Seller owns 1,000 common shares of Acme Holdings, Inc., a corporation existing under the laws of Delaware, whose registered office is 12345 Main Street, Acme, Delaware, 123456, with par value being $1.00 per share (the “Common Shares”); and

Whereas, the Seller wishes to sell to the Purchaser, and the Purchaser wishes to purchase from the Seller, an aggregate of 1,000 Common Shares of the Company upon the terms and subject to the conditions set forth herein.

Now, therefore, in consideration of the premises and the mutual agreements and covenants hereinafter set forth, and intending to be legally bound, the Parties hereby agree as follows…“

Section 2: Definitions

This section will define the key terms used throughout the document. Any well-written purchase agreement contains an alphabetical list of keyword definitions, which are usually capitalized throughout the contract. 

Definitions are critical to preventing misinterpretations. For example, does Adjusted EBITDA include market adjustments to the seller’s salaries? What payables are included in Net Working Capital? 

Some terms, such as Assets, Material Adverse Effect, or Seller’s Knowledge are used throughout the purchase agreement and can spark extensive interpretations and negotiations. 

Here is a sample list of terms that may be defined in a purchase agreement:

Section 3: Description of the Transaction

This section commonly describes the transaction at a high level, such as whether it’ll be structured as an asset sale, stock sale, or merger, and what assets and liabilities are included in the purchase price.

Legal Structure 1: Asset Sale

If the sale is structured as an asset sale, a detailed list of assets is usually appended to the purchase agreement. It’s important to list all assets and liabilities included in the purchase price, and the excluded assets. If the sale doesn’t include your custom desk, chair, artwork, or other personal effects, then be sure to list those as excluded. 

The purchase price should generally include all assets required to generate the business’s cash flow except for real property.

In an asset sale, the buyer usually only assumes short-term liabilities, such as accounts payable.

Legal Structure 2: Stock Sale

If the transaction is structured as a stock sale, the type and number of shares should be clearly listed. This is simple if there’s only one class of stock and a limited number of shareholders. Otherwise, this section can become complex as the classes of shares and the number of shareholders increase.

Legal Structure 3: Merger

In a merger, two or more companies combine into one with a single identity, typically that of the larger or largest of the companies. The new company may use the name of one of the former companies, though it’s still a new company with a new set of books and records.

Section 4: Purchase Price, Consideration and Other Clauses

This section defines the amount of the purchase price and how it’ll be paid, also called the consideration. This is usually the first significant clause in the purchase agreement.

Some of the terms used in this section may have appeared in the letter of intent, while others may be new. For example, a buyer may propose an earnout if they discover new areas of concern during due diligence. 

The purchase price should include all assets required to generate the cash flow the business produces, except for real property.

The Purchase Price

This section is relatively simple as its purpose is to define the purchase price, although the price is usually subject to adjustments. Here’s a sample clause defining the purchase price:

“The Purchase Price will be $10,000,000; plus or minus the Adjustment Amount, and the assumption of the Assumed Liabilities.“

The Adjustments to the Purchase Price clause covers any adjustments made to the purchase price, such as prorations for changes in net working capital. The purchase agreement usually includes a net working capital target, or a minimum that must be delivered at the closing. If the amount delivered at closing differs, then the purchase price will be adjusted accordingly.

Consideration

The Consideration clause describes how and when the purchase price will be paid and provides a timeline for payment.

The clause may list a variety of different forms, such as:

• Cash: The amount of cash due at closing and in what currency. If the buyer is obtaining financing from third parties, such as banks or mezzanine lenders, that will also be paid in the form of cash to the seller at closing.
• Seller Note: Seller financing is common in both small and mid-sized transactions. The seller note is documented through a Promissory Note and Security Agreement, which are included as an addendum to the purchase agreement.
• Stock: The buyer may also pay in the form of stock or shares of their company. This is more common if the buyer is publicly traded and has a ready market for their shares.
• Earnout: Earnouts are common in middle-market transactions, although they generally represent a small percentage of the purchase price, usually 10% to 15%. An earnout is an additional sum of money the buyer agrees to pay if the seller meets certain post-closing objectives. This allows the buyer to hedge their risk by paying less at closing while rewarding the seller if operations continue as planned.
• Escrow/Holdback: A percentage of the purchase price is commonly held by a third-party escrow firm to fund any indemnification claims made by the buyer after the closing. While this section sometimes occurs in other areas of the purchase agreement, it does affect how the purchase price will be paid and the amount of cash the seller will receive at closing, so I’ve included it here.

Other Clauses

The Purchase Price and Consideration section may also include clauses such as:

• Inventory: A description of the inventory included in the sale, who will count it – the buyer, the seller, or an inventory valuation service – and a representation of its condition and salability. It also provides adjustments to the purchase price based on differences in inventory between signing and closing. Note that inventory is often included in the definition of net working capital and, if so, this section won’t be necessary.
• Closing Costs: This section of the agreement explains who will pay which closing costs. Many closing costs are split equally between buyer and seller, with each party paying their own advisors.

Section 5: Representations and Warranties

What are reps and warranties?

Representations and warranties are statements and guarantees made by the parties about the transaction. Called “reps and warranties” or “R&Ws” for short, they comprise a significant portion of the purchase agreement, are heavily negotiated, and are used by many buyers to flush out potential problems. 

What’s the purpose of reps and warranties?

Buyers use reps and warranties to force the seller to disclose all material facts about the business. If the seller doesn’t disclose material facts, chances are the buyer will discover them after the closing and will then be entitled to pursue the seller for damages. 

Seller vs. Buyer Reps

The purchase agreement contains significantly more representations concerning the seller because the buyer has much more to lose. The seller is primarily concerned with receiving payment, meaning that the buyer’s representations are mainly about access to capital and authority to purchase the business.

On the other hand, the buyer is concerned about dozens of aspects of the business and its operations, so the seller’s reps and warranties relate to the assets, liabilities, and contracts of the business being sold.

Reps and warranties relate to past events and shouldn’t be used to mitigate general business risks the buyer assumes by owning a business. 

Examples of representations you might make as a seller include: 

• All assets are in good repair 
• All taxes will be paid at the closing 
• Seller has the legal capacity to sign the agreement 
• Seller has complied with all laws

Scope of Reps and Warranties in the Purchase Agreement

The scope of the reps and warranties differs from transaction to transaction. For example, a stock sale may contain a different scope of reps and warranties than an asset sale. Likewise, a buyer who is intimately familiar with an industry and is, therefore, more confident in their ability to conduct due diligence, may demand a lesser scope than a buyer who’s not. As a result, no two negotiations are alike.

What if a rep or warranty is breached?

If a representation or warranty is breached after the closing, the purchase price will be adjusted. This is usually deducted from a portion of the purchase price held by a third-party escrow firm. The Indemnification section of the purchase agreement addresses what will happen if a representation or warranty is breached, and is hotly negotiated in most cases.

Limitations to Reps and Warranties

As seller, your exposure is limited through the following:

• Knowledge Qualifiers: Limiting the reps and warranties based on the seller’s knowledge is an effective strategy for reducing the seller’s exposure. It can place the burden of proof on the buyer that the seller did not have the knowledge or information required. For example, “To the best of Seller’s knowledge” presumes the seller has made proactive efforts to obtain information.
• Materiality Qualifiers: Materiality is a measure of the relevance or significance of a threshold or event and may be addressed in individual reps and warranties. More commonly, these are collectively addressed in the Indemnification section by the use of baskets and other thresholds. Most agreements specify that only material breaches, whether relevant or significant, will be subject to indemnification. The level of materiality is usually defined by providing for a specified basket or deductible.
• Survival Periods: Reps and warranties are almost always limited to a specified time period, also called a survival period. Survival periods may differ depending on the type of representation.

Section 6: Indemnification

The Basics of Indemnification in M&A

Reps and warranties work like an insurance policy. There are exclusions or events that the policy does not cover, and there are deductibles, in the form of a basket, and a maximum payout cap. 

What is indemnification in a purchase agreement?

The Indemnification clause requires the parties to indemnify (i.e., guarantee or insure) one another for breaches of representations, warranties, covenants, and other types of claims that may arise, such as those related to tax, the environment, or employee issues. The Indemnification clause – sometimes called a Hold Harmless clause – functions similarly to an insurance policy and requires the breaching party to reimburse the other for all expenses resulting from a breach.

Why is a portion of the purchase price escrowed?

In most M&A transactions, 10% to 20% of the purchase price is withheld by a third party in an escrow account to fulfill any post-closing indemnification obligations. This prevents the seller from running off to the Maldives with all the dough and leaving the buyer empty-handed.

Indemnification vs. General Rights 

Indemnification rights are much more specific than the general legal rights included in most contracts. The indemnification provisions include specific rules governing the level of involvement the parties may have in defending suits or other claims, and other options rarely afforded to the parties under the general legal rights.

Common Disputes in M&A

Examples of potential disputes include:

• Inaccurate financial statements
• Tax claims
• Loss of key employees
• Loss of key customers
• Inaccurate working capital calculations
• Undisclosed pending litigation
• Undisclosed material liabilities, such as unpaid bills
• Undocumented employees
• Violations of post-closing covenants, such as non-competes or NDAs

Limitations to Indemnification

Indemnification is normally subject to limitations, such as the maximum indemnification (a cap) and a minimum threshold that must be triggered (a basket). The latter is similar to an insurance deductible. 

Knowledge Qualifiers in the Language

Indemnification can also be limited by knowledge qualifiers such as “to the best of seller’s knowledge” or “to seller’s knowledge,” materiality qualifiers, and survival periods. For example, the reps and warranties normally expire after 18 to 24 months. These collectively serve to limit the seller’s exposure level and further allocate risk between the parties beyond the specific language provided in each individual representation.

Reps and Warranties Work Like an Insurance Policy

In summary, reps and warranties work like an insurance policy. There are exclusions or events that the policy does not cover, and there are deductibles in the form of a basket, and a maximum payout cap. 

Section 7: Covenants

Covenants are agreements to take a certain action (a positive or affirmative covenant) or not to take it (a negative or restrictive covenant). Covenants govern which actions the parties can or must take either before the closing (pre-closing covenants) or after the closing (post-closing covenants). They provide a guide for how the parties are expected to act during and after the transaction.

For example, a common pre-closing covenant requires the seller to continue operating the business in the normal course of events. A common post-closing covenant may require the buyer to offer the staff employment on similar or better terms than those they have with the seller.

Covenants Serve as Closing Conditions

Covenants also serve as closing conditions. Violating a covenant implies that a condition to closing has been violated, and the party not in breach will be able to claim indemnification from the other or terminate the agreement.

If the purchase agreement is signed before the closing, it will require significantly more covenants, specifically pre-closing covenants.

Example Pre-Closing Covenants 

Positive and restrictive pre-closing covenants include:

• Ordinary Operations: The seller will continue to operate the business in the ordinary course and won’t take any significant actions without the buyer’s prior consent, such as hiring new employees, handing out bonuses, giving employees raises, or making purchases above a certain amount. 
• Material Changes: The seller will notify the buyer if any events may cause a material adverse effect on the business.
• Access to the Business: The seller agrees to provide the buyer with reasonable access to the business, the seller’s premises, personnel, and assets during the due diligence process.
• Exclusivity: The seller may agree to an exclusivity, or “no shop” clause, agreeing not to enter into any competing negotiations with another buyer.
• Obtain Approvals: The buyer may agree to obtain all applicable governmental and third-party approvals and consent.
• Funding the Purchase: The buyer will use best, or commercially reasonable, efforts to secure financing to fund the purchase price.

Example Post-Closing Covenants 

Positive and restrictive post-closing covenants include:

• Transition Services: The seller will agree to provide transition services during the transition period.
• Liability Insurance: The buyer will agree to provide directors and officers (D&O) liability insurance to the seller.
• Confidentiality: The seller will agree to maintain confidentiality over the terms of the transaction.
• Employee Retention: The buyer will agree to offer employment to the seller’s employees for at least the same compensation and benefits being paid by the seller. Note: the buyer may require the seller to pay employees accrued and unpaid compensation and benefits before closing, unless those amounts were included in the balance sheet calculations and reflected in the purchase price adjustments.
• Non-Compete: The seller will agree not to compete with the business, typically for three to five years. Non-compete covenants usually have three limiting qualifiers placed on them – limitations to a specific geographic area, duration, and scope. The scope generally covers at least where the seller currently conducts business and areas where the buyer operates and intends to expand. 
• Non-Interference: This covenant is designed to strengthen the covenant not to compete. It prevents the seller from “interfering” with the business’s customers, vendors, and other relationships and may include language that protects the business and buyer from disparagement. 
• Non-Solicitation – Customers: Another extension of the covenant not to compete is a seller’s covenant not to solicit any past, current, or prospective customers. Still, even without a specific non-solicitation of customers or non-interference covenant, the covenant not to compete will protect the purchaser from these matters, if it is drafted well.
• Non-Solicitation – Employees: Separately or combined, non-solicitation may also prevent the seller from poaching employees and former colleagues for their own purposes. This can include a no-hire stipulation for key employees, which safeguards the buyer’s operations for a given period after transition. 

Section 8: Conditions

Conditions are events that must be met or take place before closing can occur, such as the buyer obtaining financing, getting a license, transferring a lease, or receiving franchisor approval. The purchase agreement will contain conditions, or contingencies, that must be satisfied if it’s signed before closing occurs.

This section of the purchase agreement is only necessary if it is signed prior to closing. If so, and a closing condition has not been satisfied, then in most cases, the buyer can terminate the agreement without effect.

Section 9: Termination

What is termination in an M&A purchase agreement?

Termination provisions outline how, why, and when parties can terminate the deal. They include conditions for canceling the agreement and penalties for defaulting, such as a break-up fee for the terminating party, or obligating one party to reimburse the other’s expenses. Termination rights can be invoked when any conditions to the sale can’t be fulfilled. 

This section explains the effect of termination, usually specifying that some provisions of the purchase agreement will survive termination, such as confidentiality and miscellaneous clauses.

When is a termination section necessary?

This section is only necessary if the purchase agreement is signed prior to the closing. 

How much are termination fees?

Termination fees range from 2% to 3% of the purchase price. They’re intended to penalize the seller or buyer for a last-minute change of heart, to reduce liability and cover the other party’s costs, and to discourage sellers from entertaining other buyers. 

Are termination fees common in M&A?

As the seller, you generally shouldn’t expect to receive a termination fee if the buyer walks away before the closing date, unless the purchase agreement is signed well before and there’s a significant delay between signing and closing.

What is a drop dead date?

A drop-dead date is also commonly included in this section. This date specifies that the agreement will be terminated if the closing does not occur by then. Usually far in the future, the drop-dead date prevents parties from indefinitely committing to the transaction, even if it drags out well beyond the intended timeframe.

Section 10: Miscellaneous Provisions

This section includes most of the general provisions you’d expect to see in any legal agreement, including attorney fees, a note on the governing law, mediation, severability, etc. 

Ancillary Agreements and Closing Deliverables

While not of essence to the deal, certain additional agreements bring everything together in a structured way, and help you to plan and finalize the deal.

• Assignment of Membership Interest: This is often needed to officialize the transfer of securities if the purchase agreement is for a stock or membership interest. 
• Employment and Consulting Agreements: These are used to retain certain employees if they’re important to the business, including the former owner, if applicable.
• Financing Instruments: When the seller is financing a portion of the purchase price, they may need the buyer to sign a promissory note. This is tied to the business and provides security for the seller, should the buyer fail to meet a payment. 
• Allocation of Purchase Price: This document breaks down the purchase price into separate asset classes for the purposes of filing IRS Form 8504. 
• Assignment of Contracts: This document transfers third-party contracts from the seller to the buyer upon closing. It may not be necessary for stock sales, as some agreements are transferable despite a significant change in the entity’s ownership.
• Assignment of Premises and Equipment Leases: The assignment of equipment leases transfers the leases for any rented equipment to the buyer, while an assignment of a premises lease transfers the leases for the premises to the buyer. The seller usually remains as a guarantor on the lease until it expires.
• Assignment of Intellectual Property: This exhibit transfers any intellectual property from the seller to the buyer, such as patents, trademarks, or other registered intellectual property. It can also transfer non-registered intellectual property, such as phone numbers, websites, and content.
• Assignment of Shares for a Stock Sale: This document transfers shares of the entity. It is used for stock sales only.
• Bill of Sale for an Asset Sale: This document transfers the company’s individual assets. The bill of sale should list all tangible and intangible assets included in the sale. Some advisors list intangible assets separately and transfer them using a separate set of exhibits.
• Corporate Resolution: A corporate resolution is required in an asset sale if the seller is an entity. Technically, the seller in an asset sale is the entity (corporation or LLC), and a corporate resolution is required in the corporate bylaws when taking major actions, such as selling all assets of the company. This resolution is not required if the seller is selling the entity itself, as in a stock sale.
• Deed of Sale of Entity: This document is required if the seller is selling the shares or stock of the entity.
• Independent Contractor Agreement: This agreement is necessary if the seller will continue working for the buyer in some capacity, although it can also take the form of an employment agreement.
• List of Assets: This is a detailed list of all tangible assets transferred. This list is not necessary for stock sales, although it doesn’t hurt to be clear on which assets are owned by the corporation or LLC and which are owned by the seller personally. An accurate list of assets can help prevent future litigation around which are included in the sale.
• List of Intangible Assets and IP: This exhibit is a list of intangible assets included in the sale, such as phone numbers, websites, and intellectual property. 
• List of Titled Property: A list of titled property includes such assets as real estate or vehicles. These assets require a separate set of transfer procedures.
• Subscription Agreement: If the purchase price includes a portion of equity from buyer to seller, a subscription agreement may outline the shares and their price. An operating agreement or shareholders’ agreement may also feature. 
• Non-Competition Agreement: This agreement contains a description of what the seller may and may not do and for how long. Almost all M&A transactions include a non-compete agreement, sometimes included as a clause in the purchase agreement and sometimes listed separately as an exhibit. The non-compete agreement should be voided if the buyer defaults on payments to the seller.
• Promissory Note and Security Agreement: These are required for asset sales if seller financing is involved. The promissory note outlines the terms of repayment, and the security agreement is a document allowing the seller to place a lien on the assets of the business until the buyer pays in full. A UCC-1 legal notice must also be filed by creditors to perfect the lien.
• Share Pledge Agreement: For stock sales where a seller note is involved, shares of the entity can be held in trust or escrow until the seller is paid in full, which is similar to placing a lien on the assets of the company. Still, it is good practice to have a third party physically hold onto the shares until the note is paid in full.
• Training Log: Logging the completion of the training period is good practice to prevent potential future litigation.
• Good Standing Certificates: These are helpful inclusions from both parties, alongside copies of accreditations, formation papers, and other organizational documents. 
• Authorizations: Any and all approvals and authorizations from the boards, managers, and directors of both companies approving the deal and promising their necessary input.

Conclusion

Now you’re aware of everything you can expect to find in a purchase agreement – its stocks, costs, claims, and covenants – and you’re ready to take it all the way to closing day. 

Of course, the letter of intent is the seed that grows the purchase agreement. How well you planned it, sowed it, and nurtured it, informs every pitfall and hurdle you’re dealing with now. 

But the past is the past. There’s still time to negotiate a better purchase agreement, to make sure indemnification is carefully tailored, and to armor yourself with reasonable reps and warranties.