In the electronic security industry, many companies grow by acquiring accounts. This results in a knowledge gap between buyers with significant acquisition experience and sellers with little or no experience and who may be selling a company they have spent years building. While acquisitions vary, certain key documents are present in just about every deal. My advice—don’t sign any of these agreements without consulting experienced industry legal counsel.
1. Broker’s Agreement
Not every buyer uses a broker to find sellers. And not every seller uses a broker to find the best buyer. Those who do, however, know that the right broker can be invaluable in getting the best possible deal. A broker’s agreement is not a “shared” document executed by both parties. It’s an agreement between one of parties and the broker, executed before the deal and details the broker’s services, time limitations on the relationship and payment the broker may receive on closing.
2. Non-Disclosure Agreement
Likely the first document buyer and seller sign, an NDA requires the parties to maintain the confidentiality of exchanged information and is crucial to the seller—the party disclosing confidential customer, financial and sales information. An effective NDA must contain all of the necessary provisions or it will be of little or no use. While these agreements generally follow a standard form, they are not mere boilerplates. The parties should resist the urge to adopt an agreement from another transaction and should negotiate terms specific to their deal. And most of all, sellers should get their counsel to prepare the NDA. Otherwise, it could be the fox guarding the hen house.
3. Letter of Intent
Often misunderstood, LOIs detail deal terms. Usually prepared by the buyer, sellers often sign LOIs without asking counsel for review, believing an LOI to be non-binding. This classic mistake can have significant consequences. While the LOI permits the buyer to walk away based on the results of due diligence, LOIs generally require the seller to close the deal under the stated terms. Seller’s counsel also will have a difficult time negotiating many protections once the terms are reduced to writing in the LOI. An LOI typically precludes the seller from speaking with other potential acquirers and may limit seller’s ability to conduct business during due diligence.
Buyers also should take LOIs seriously. An inadequately drafted LOI, alone or in combination with the circumstances surrounding a proposed acquisition, may obligate the buyer to close despite dissatisfaction with due diligence. Courts have enforced LOIs against reluctant buyers, awarding significant damages to disappointed sellers.
4. Asset Purchase Agreement
The primary, negotiated document in any asset deal, the APA memorializes all of the terms and conditions. Typically, an APA has several important and inter-related sections:
Guaranty and Purchase Price includes the crucial and much-negotiated definition of qualified recurring monthly revenue, as well as parameters of any post-closing performance guaranty. (See my article in the Dec. 2012 issue, www.securityinfowatch.com/10835330 for an explanation of price and performance guarantees.)
Representations and Warranties are present in virtually every acquisition agreement, typically to provide buyers with protection on issues relating to seller’s business and accounts. Essentially, the seller represents some set of facts or legal condition to be true as of closing and then warrants the representation following the closing date. The warranty forms the basis for the buyer’s recovery, should the representation turn out not to be true.
Indemnity Provisions allow buyers and sellers to recover damages for breaches of representations or warranties, or for third-party claims and are often the subject of extensive negotiation respecting liability caps, deductibles and time limitations.
Restrictive Covenants limit the legal right of seller and seller’s principals to compete with buyer post-closing and prohibit the selling parties from soliciting or accepting business from accounts sold to buyer. Well-drafted provisions are enforceable but must be reasonable in scope and duration.
Regardless of whether they’ve done one deal— or 50—all parties should read, understand and have counsel review these key documents before signing them.
