Business Acquisition Agreements Are Different from Standard Contracts
Business acquisition (or purchase) agreements are somewhat different from standard contracts. If you’re planning on purchasing a business or buying a significant portion of a company’s assets, you should familiarize yourself with two important provisions: pre-closing covenants and closing conditions.
Pre-Closing Covenants in a Business Acquisition Agreement
Business acquisition agreements usually list several covenants (or promises) that require the buyer and seller to perform certain tasks or refrain from doing specific things. Much like buying a house, there may be a time lag between signing the purchase agreement and officially closing on the sale. In these situations, it’s standard procedure to see quite a few pre-closing covenants.
As a buyer, you will most likely perform a thorough inspection of the company’s assets, accounts, business records, and operating procedures before you close on the deal. Additionally, both sides typically use the time period between execution of the agreement and closing to draft legal documents, file necessary government forms, and secure consent from shareholders and other individuals. During this span of time, you might see any of the following pre-closing covenants:
- Both sides promise to use their best efforts to satisfy all conditions prior to closing
- Seller promises to refrain from entertaining offers from other buyers
- Seller agrees to give buyer access to seller’s facilities, offices, assets, and company records
- Seller promises to run its business as usual
- Seller promises to retain all its equity
- Seller agrees not to amend its operating agreement
- Both sides promise to refrain from any activity that would harm the business
- Seller promises to secure all necessary consents
Whether you’re buying a small shop or a large company, closing can be a nerve-wracking prospect. Just as you would see in a home sale situation, the weeks and days (and sometimes hours) leading up to a scheduled closing typically involve a flurry of activity and the performance of critical, last-minute tasks. Closing conditions refer to things that must happen before the closing can come to pass. It’s worth noting that closing conditions are unnecessary if you plan on executing the contract and closing simultaneously.
Common examples of closing conditions in business acquisition agreements include:
- Both parties have adhered to all pre-closing covenants
- There are no pending cases or liens that would prevent the transaction from being completed
- There have been no negative, material changes in the company or its assets
- The buyer has obtained all necessary consents
- All warranties and representations have been truthfully and accurately stated
In some cases, the parties may decide to proceed with closing even if a pre-closing condition has not been met. These are complex agreements that require the advice and skill of a seasoned business and commercial transactions attorney. If you want to buy or sell a business, or you have other business-related questions, contact the business lawyers at the Law Office of Randy L. Smith, LLC today at (417) 841-2775.
This website has been prepared by The Law Office of Randy L. Smith, LLC for informational purposes only and does not, and is not intended to, constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.