LUTZ BUSINESS INSIGHTS
5 key purchase agreement considerations
bill kenedy, LUTZ consulting and m&A shareholder
The purchase agreement is a major component of an M&A deal. It is the contract that documents all of the terms agreed upon between the buyer and the seller in a transaction. Without one, it would be nearly impossible to bring a deal to a successful closing. However, for a buyer and seller to reach deal closing, they must settle a few key matters within the final contract.
Below are five important topics to consider in an M&A transaction’s purchase agreement:
1. Purchase Price
Most M&A deals are negotiated on a “cash free/debt free” basis. In simple terms, this means the seller keeps all of the cash and pays off all of the debt at the time of the sale of the business. In almost all circumstances, shareholder loans, bank debt, unpaid dividends and overdraft facilities will be treated as debt.
Earn-out is a mechanism used in an M&A transaction through which a portion of the purchase price is paid contingently upon the occurrence of certain events. This amount is usually calculated based on the performance of the acquired business over a specified period of time following the closing.
Earn-outs are most commonly used to bridge the business valuation gap between a seller and a buyer. It allows sellers to potentially facilitate a higher price and provide buyers with an additional financing option to pay for the acquisition through future profits of the acquired business.
3. Establishing a Net Working Capital Peg
A net working capital peg is used to ensure the seller is not collecting most of the A/R out of the business, liquidating inventories, or slowing payment of accounts payable prior to close. In the case of a deficit of net working capital at close, the buyer may reduce the cash to the seller by the amount of the deficit.
4. Equity Roll
Many buyers often encourage selling owners to “roll over” a portion of their equity. Meaning, the seller will own a minority equity position in the company after the transaction closes. Rollover equity is a form of seller financing and it is often used to bridge financing and valuation gaps. Rollover equity also represents a powerful tool for aligning the seller/founder’s interests with the buyer’s interests.
Other topics outlined in a purchase agreement include:
- Employment agreements
- Consents on certain contracts
All of these terms represent important legal components of the purchase agreement that should be given consideration when contemplating the sale of a business. Consulting with an M&A advisor on these matters can help your business deal come to a successful closing. Please contact Lutz M&A for questions on this topic or for transaction assistance.
ABOUT THE AUTHOR
BILL KENEDY + LUTZ CONSULTING AND M&A SHAREHOLDER
Bill Kenedy is a Lutz Consulting and M&A Shareholder at Lutz. He specializes in business valuation, litigation support, and merger and acquisition advisory services.
AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
- American Institute of Certified Public Accountants, Member
- Nebraska Society of Certified Public Accountants, Member
- Certified Public Accountant
- Accredited in Business Valuation
- Certified in Financial Forensic
- Certified Exit Planning Advisor
- BSBA in Accounting, St. John’s University, Collegeville, MN
- Construction Financial Management Association, Past Treasurer, Board Member
- A Time to Heal (non-profit focused on cancer patients), Past Board Member
- Understanding the Tax Implications of a Business Sale
- The M&A Client Experience
- Lutz M&A Advises Midwest Scaffold Service on its Sale to Sunbelt Rentals
- 5 Key Purchase Agreement Considerations
- Net Working Capital: What is it and How is it Used?
- Issues During the Due Diligence Process in M&A Transactions
- Lutz M&A Advises Fantasy's, Inc. on its Acquisition by Casey's General Stores
- Primary Benefits of Selling Your Company to an ESOP
- Is An Employee Stock Option Plan Right for Your Business?
- Lutz M&A Advises C&W Transportation on its Sale to Platform Capital
- Our Services, Our People, and Our Results
- Lutz M&A Advises Hands of Heartland on its Recent Investment by Evolve Capital
- Lutz M&A Advises Labor Source on its Recapitalization by Great Range Capital
- Overcoming Obstacles in Business Transition Planning
- Understanding Net Working Capital in Business Transactions
- How to Increase the Value of Your Business
- When is the Right Time to Exit My Business?
- Lutz M&A Advises Triage Staffing on Recapitalization
- Lutz M&A Advises Hockenbergs on Recent Sale to Trimark USA LLC
- Lutz M&A Advises Focus Respiratory on its Recent Buyout by Valley Healthcare Group
- Is Your Small Business at Risk of Fraud?
- Lutz M&A Advises CCW, LLC on its Recent Buyout
- Lutz M&A Advises NIFCO Mechanical Systems on Recent Sale
- Lutz M&A Advises Midwest Door & Hardware on Recent Sale
- Why is Forensic Accounting Needed?
SIGN UP FOR OUR NEWSLETTERS!
We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.
13616 California Street, Suite 300
Omaha, NE 68154
747 N Burlington Avenue, Suite 401
Hastings, NE 68901