From Letter of Intent to the Definitive Purchase Agreement

After completing confirmatory due diligence, the parties move toward finalizing the purchase agreement. This definitive agreement governs the transaction and establishes each party’s binding obligations. The Letter of Intent provides the framework for these negotiations. It generally outlines purchase price, structure, consideration, working capital, and other principal business terms. The purchase agreement goes considerably further. It converts negotiated terms into detailed contractual provisions and addresses risks identified during due diligence.

Although transaction attorneys draft and negotiate the agreement, many provisions involve significant business decisions. Sellers should therefore understand the economic consequences behind the legal language. A typical purchase agreement addresses three broad areas:

• Transaction Economics: Purchase price, consideration, payment timing, earnouts, seller notes, rollover equity, and post-closing adjustments.
• Closing Mechanics: Closing conditions, required consents, covenants, financing requirements, schedules, and procedures for completing the transaction.
• Risk Allocation: Representations, warranties, indemnification, escrows, holdbacks, baskets, caps, survival periods, and dispute procedures.

The agreement also defines exactly what the buyer acquires. In an asset sale, it identifies purchased assets and assumed liabilities. By comparison, an equity transaction transfers ownership interests in the legal entity. The agreement must still address excluded obligations and other negotiated protections.

Working capital frequently receives significant attention during negotiations. The agreement establishes the target, calculation methodology, and process for resolving post-closing differences. Representations and warranties serve another purpose. They provide factual statements about the company, its operations, financial condition, contracts, employees, taxes, and other matters. Disclosure schedules then qualify those representations by identifying exceptions. Accurate schedules help sellers disclose known issues and reduce potential post-closing disputes.

Once negotiations reach this stage, the transaction attorney takes the lead on legal documentation. However, the attorney should not work independently from the broader M&A team. The M&A advisor helps ensure the agreement accurately reflects the business terms negotiated in the LOI. The advisor also evaluates proposed changes affecting purchase price, consideration, working capital, and other economics. Meanwhile, the seller’s CPA and tax advisor evaluate accounting and tax provisions. Their input may become particularly valuable when addressing allocations, working capital, and transaction structure.

New issues may still emerge before closing. When they do, the advisory team should evaluate their legal, financial, and economic consequences together. A well-negotiated purchase agreement does more than document the sale. It preserves negotiated economics, allocates transaction risk, and establishes clear obligations through closing and beyond.