Mergers & Acquisitions

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M&A Purchase Agreement | A Complete Guide

What is a Definitive Purchase Agreement (DPA)?

A DPA transfers the ownership of a business and its assets.

The DPA is called “definitive” because it is the final agreement signed between the parties. This replaces any previous agreements, such as a letter of intent or offer to purchase.

The DPA is often signed before the closing occurs. However, a change of possession of the business does not occur until closing, when the bill of sale is signed and delivered to the buyer in the case of an asset sale or when the stock certificates are signed in the case of a stock sale.

If the DPA is signed prior to closing, contingencies may remain, such as denial of approval by key third parties, including the lender, lessor, franchisor, or licensor. The sale is canceled if these contingencies are not satisfied before closing or before the expiration of the DPA.

The transaction can take two general forms:

  • Stock Purchase Agreement (SPA). This transfers the shares of the entity, otherwise known as a corporation or LLC, that owns the assets of the business. By purchasing the shares of the entity, the buyer owns the entity’s assets. Shares in an LLC are technically called “membership interests.” However, for the sake of simplicity, most parties refer to the transaction as a “stock sale.”
  • Asset Purchase Agreement (APA). This agreement transfers the individual assets from the seller to the buyer by signing a bill of sale. However, the seller retains ownership of the entity while the buyer forms a new entity to purchase the assets.

The DPA sets a date for completing the transaction, the process known as the “closing.” Before the closing date, the seller and the buyer should resolve any remaining contingencies.

On the closing date, the seller and buyer may physically meet around a table, where the buyer delivers the final payment and the seller signs and delivers the closing documents. Alternatively, they may sign the documents electronically or via FedEx. Most of our closings are virtual closings where documents are sent electronically or via next-day delivery.

Read on to see how the process unfolds and what it incudes.


Table of Contents

  • The Process from LOI to Signing the Purchase Agreement
  • Supporting Documents to the Definitive Purchase Agreement
  • Definitive Purchase Agreement Clauses

The Process from LOI to Signing the Purchase Agreement

Here is a description of the process from signing the LOI to closing:

Letter of Intent (LOI): The buyer and seller sign the LOI, which is usually non-binding.

Due Diligence: Due diligence begins when the LOI is accepted. Due diligence typically lasts 30-60 days.

Purchase Agreement: The parties’ attorneys draft the purchase agreement. Negotiating the terms of the purchase agreement often takes several weeks.

Conclude Due Diligence: The buyer signs off on the completion of due diligence once the buyer is satisfied. Additional contingencies remain prior to the closing.

Closing: The closing is conducted via a round-table or virtually. The purchase agreement is either signed prior to, or at the closing.


Supporting Documents to the Definitive Purchase Agreement (DPA)

Supporting documents are attached to the DPA as schedules or exhibits. Typical supporting documents include:

  • Allocation of Purchase Price: This document breaks down the purchase price into separate asset classes for purposes of filing IRS 8504.
  • Assignment of contracts: This document transfers third-party contracts from the seller to the buyer upon the closing. This document may not be necessary for stock sales, as some agreements are transferable despite a significant change in the entity’s ownership.
  • Assignment of equipment leases: The assignment of equipment leases transfers the leases for the premises to the buyer. The seller usually remains as a guarantor on the lease until the lease 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 via a bill of sale. 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, such as in a stock sale.
  • Deed of sale of entity (if selling the entity or stock): This document is required if the seller is selling the shares in the entity.
  • Independent contractor agreement: The independent contractor 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 that are transferred. This list is not necessary for stock sales, although it does not hurt to be clear on which assets are owned by the corporation or LLC and which assets are owned by the seller personally. Keeping an accurate list of assets can help prevent future litigation regarding which assets are included in the sale.
  • List of intangible assets and intellectual property: This exhibit includes a list of intangible assets included in the sale, such as phone numbers, websites, etc.
  • 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.
  • Non-competition agreement: The non-competition agreement contains a description of what the seller may and may not do and specifies the length of time the agreement stands. Almost all M&A transactions include a non-compete agreement. Sometimes this agreement is included as a clause in the purchase agreement, and sometimes it’s 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 (if there is a seller note and an asset sale): This document is 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 also needs to be filed to perfect the lien.
  • Seller’s disclosure statement: This is a statement made by the seller regarding any adverse conditions of the business that the buyer should be aware of. Notifying the buyer in writing of any material, adverse conditions of the business prevents potential litigation.
  • Share pledge agreement (if there is a seller note and a stock sale): For stock sales, 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. However, it is a good practice to have a third party physically hold onto the shares until the note is paid in full.
  • The release of holdback: Savvy buyers will request that a percentage of the purchase price be held in escrow until the training period is complete. In some middle-market transactions, this amount can be held in escrow for 12 to 24 months to cover any additional unknown variables, such as customer warranty claims, gift certificates, etc. The amount held varies from 5% to 20%, or more, of the purchase price.
  • Training log: Logging the completion of the training period is a good practice to prevent potential future litigation.

Definitive Purchase Agreement Clauses

Typical clauses in a Definitive Purchase Agreement:

  • Definitions: Any well-written purchase agreement contains definitions of the key terms used throughout the document. This section clarifies confusion regarding these terms, e.g., how is the term “closing” different from “change of possession”? Is the “closing” date the same as the “change of possession” date?
  • Price: This defines the amount of the purchase price, typically broken down by the earnest money deposit, the down payment, additional deposit upon conclusion of due diligence, amount of seller financing, third-party financing, and the holdback amount. It also details whether an earnout is involved.
  • Inventory: This section contains a description of the inventory included in the sale as well as who will count the inventory — the buyer, the seller, or an inventory valuation service. It also provides adjustments to the purchase price based on differences in inventory between signing and closing and a representation of the condition and salability of the inventory.
  • Contingencies: The purchase agreement contains contingencies if it is signed before closing. Buyer contingencies can relate to obtaining financing, obtaining a license, transferring a lease, or obtaining franchisor approval.
  • Closing costs and prorations: This area of the agreement explains who will pay which closing costs. Many closing costs are split equally between the buyer and the seller, with each party paying their own advisors.
  • Representations and warranties: Representations and warranties are statements and guarantees by the seller relating to the assets, liabilities, and contracts of the business being sold. The seller is assuring the buyer that the representations are true, and if proven to be otherwise, the buyer is entitled to seek legal remedies, which could result in damages payable to the buyer. Representations and warranties (called “reps and warranties” for short) are heavily negotiated in larger transactions and used by many buyers to flush out potential problems. As a seller, you want to ensure that any statements you make are factual and accurate. 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.
  • Training: This section outlines in detail the length and form of the training agreement. Being highly specific regarding the length of the training agreement, including how many hours and on what terms, is a good practice. Not doing so can lead to post-sale disagreements, and buyers sometimes sue sellers for failure to train them properly.
  • Confidentiality: This clause is sometimes included, even though a separate confidentiality agreement may already exist.
  • Default and remedies: This area includes conditions for canceling the agreement and penalties for defaulting, including a break-up fee.
  • Miscellaneous legal provisions: This section can include attorney fees, mediation, indemnification, entire agreement, severability, governing law, risk of loss, and other provisions that generally apply to all legal agreements.