Did you know that the typical M&A transaction will have at least 8 – 10 agreements as part of the entire document group called the “Definitive Agreements?” Most first-time buyers/sellers assume there is only one agreement (the Purchase Agreement), which is a huge misconception.
In our last post we reviewed legal fees and how much they might be in a typical M&A transaction as a seller. We can wrap a little more context around those fees because, as you just read, there are multiple agreements that your legal advisor will need to review.
Here are the typical agreements I see in a standard transaction process:
- Broker – Seller Agreement: The Seller Agreement specifies the terms and conditions for how, what, and how much you will pay your M&A Advisor, Investment Banker, or Broker.
- Non-Disclosure Agreement: The agreement where Parties understand that each is willing to share Confidential Information with the other for the purpose of considering a business relationship.
- Indication of Interest or Expression of Interest (IOI or EOI): An IOI is a non-binding letter prepared by the buyer for the seller. The main purpose is to express a genuine interest in purchasing the company before the issuer has had the opportunity to review sufficient data (due diligence).
- Letter of Intent (LOI): The LOI is a document that outlines the terms of an agreement. While this is typically non-binding, it is important to list out the key aspects of the deal in this document as it will serve as the foundation of the definitive purchase agreement.
- Stock or Asset Purchase Agreement (SPA or APA): Purchase agreements are legally binding contracts between shareholders and companies. Also known as share purchase agreements, these contracts establish all of the terms and conditions related to the sale of a company’s assets or stocks.
- Other agreements commonly found are as follows:
- Promissory Note
- Non-Solicit/Non-Compete aka Restrictive Covenants Agreement
- Employment Agreement
- Escrow Agreement
The SPA or APA, along with the agreements in the bullet point list above, make up the collection of agreements that we call the “Definitive Agreements”. This mountain of paperwork requires several reiterations of review by both your counsel and the buyers counsel, which typically takes around 30 days to complete.
The most common Pre-LOI and Definitive Agreements in an M&A transaction:
As a buyer, you are typically responsible for creating all of these documents for the seller to review. This can add up considerably in terms of time and legal expense. On the buy-side, these agreements can cost about 1% of the purchase price with a minumum $100K fee. On the sell-side, this number is usually 40% – 60% lower, since you are reviewing what the buyer presents. Still an expensive endevour!!
If you want to learn more about these documents or get examples of actual documents used in transactions, we have created M&A document templates for both buyers and sellers. Whether you are buying or selling, its good to see samples of what these documents can and will look like so you can be prepared for your own transaction.