Business Deal Terms
LETTER OF INTENT (LOI)—non-binding deal points—the handshake.
• Key Components—big business points, non-binding, confidentiality, exclusive negotiating period.
• Must Watch For—unintentional binding clauses.
MEMORANDUM OF UNDERSTANDING (MOU)— short binding agreement until real agreements are developed.
• Key Components—big business points and some details, binding, confidentiality, period of time to draft formal agreements. Divorce clause if can’t.
• Must Watch For—areas of disagreement created by ambiguity. One party usually trying to rush the other.
PURCHASE & SALE AGREEMENT (PSA)—usually for a real estate based transaction.
• Key Components—Title, Environmental, Indemnifications, Contingency Definitions, Contingency Period, Closing Date Deadlines and/or Extensions, Financing Structures, Remedies. May need small Asset Purchase Agreements and Assignment of Contracts. Rarely if ever “Sign & Close”.
• Must Watch For—deadlines, approvals, disapprovals, waivers, deposit wars, business assets tied to the land. Third Party environmental indemnifications that evaporate and/or recorded covenants that affect financing or resale.
STOCK PURCHASE AGREEMENT OR MEMBERSHIP INTEREST PURCHASE AGREEMENT (SPA OR MIPA)– purchasing someone’s certificate of ownership in the existing entity.
• Favors Sellers with Capital Gain treatment and shedding of liabilities to the Buyer.
• Key Components—Lots of Representations & Warranties, Purchase Price Formula, Balance Sheet Adjustment Language, Financing Structures. Usually accompanied by employment/consulting agreements for Seller and/or key people.
• Must Watch For—Liability issues—employment practices, employee benefits, taxes, vendors, others. Capital Expenditures required. Accounting Practices.
SUBSCRIPTION /REDEMPTION—purchasing newly issued shares/interests from company treasury or selling back to the company treasury.
• Key Components—Securities Representations in the Appropriate Jurisdictions, Representations and Warranties, Financing Structures, Inclusion in Current Transfer and Operating Restrictions on the Owners.
• Must Watch For—Investor Qualification & Disclosures
• Key Components—Title Representations, Financing Structures, Compliance with Transfer Restriction Procedures
• Must Watch For—Legal Prohibitions and Tax Issues
APA—ASSET PURCHASE AGREEMENT—purchasing the assets of a business, not the entity ownership.
• Favors Buyers—Due to stepped up basis on assets to depreciate and little if any liabilities.
• Key Components—Definition of Assets Purchased, Definition of Liabilities Assumed (if any), Financing Structures, Ancillary Agreements—Assignments, Bills of Sale, Assumptions, etc.
• Must Watch For—Missing an Asset or Liability, Third Party Consents, Successor Liability issues with employees and vendors, Bulk Sales laws.