Draw up business acquisition contract
Acquiring a company can be simpler and more efficient than starting a company from scratch. That is why many companies focus on concluding mergers and acquisitions, or M&A. For a company takeover, a company takeover contract is drawn up between the buyer and seller. This agreement sets out, for example, the sale of shares in the company or the contractual transfer of assets (and/or liabilities). A contract for the takeover of a company is essential for limiting risks and setting out wishes and intentions in black and white.
Mergers and acquisitions: promising in every sector
M&A deals are a promising way to start, expand or diversify a company and occur in virtually every sector. Just like merging with another company, it can give the buyer access to new customers, distribution channels, skills and knowledge. At the same time, the buyer gains access to more resources, such as personnel, additional branches and intellectual property. Such an excellent opportunity is not without risks. Therefore, draw up a good business acquisition contract.
Before concluding a business acquisition contract
When buying a company and acquiring shares or assets, buyers would be wise to first draw up a letter of intent and then perform due diligence on the various legal, accounting and operational aspects of the desired company. After this verification period, buyers will have a better understanding of the risks involved in the transaction and can negotiate with sellers on ways to mitigate these risks. The next step is to draw up a purchase agreement for the business acquisition, or a business acquisition contract.
What is laid down in the purchase agreement?
Various matters must be clearly laid down in the business acquisition contract. This is important in order to prevent disputes afterwards. What exactly is being acquired varies depending on the type of business. In addition, different agreements may be made for each business acquisition, for example regarding the transfer of customers, profit distributions for the former owner (earn-out) and other relevant aspects of mergers and acquisitions. For this reason, there is no ready-made example of a business acquisition contract. However, there are a number of essential elements that are included in almost every purchase agreement for a business acquisition.
• The components of the agreement
• The price
• The date of transfer of ownership
• Declarations and warranties
Components of a business acquisition contract
It may sound obvious, but it is important to describe precisely which components are being acquired in the company acquisition. For example, which shares are involved? Are employees or potential debts being acquired by the buyer? And which customers are included in the deal? In addition, various guarantee provisions and, if applicable, approval resolutions or shareholder agreements are laid down in the business acquisition contract. You can view a shareholder agreement example here.
The amount of the business acquisition
In some cases, the price is a predetermined or agreed amount. Once the hurdle of determining this has been overcome, it is a simple element of the company acquisition contract. In practice, it is common for the sale price to consist of a fixed amount and a variable part. The variable part requires a clear legal description and substantiation, so that no discussion can arise about it afterwards.
Date of transfer of ownership
This needs to be carefully considered. Which date is most convenient in terms of financial and tax consequences or benefits? And are there any conditions precedent that must first be fulfilled?
Declarations and guarantees
The business acquisition contract includes various declarations by the buyer and seller, for example about the condition of the goods and the accounts receivable. It is also important to record who is liable for what and what the consequences are if agreements are not fulfilled or complied with. Many business acquisition contracts include guarantees and indemnities.
Non-competition clause
A business takeover often involves the buyer taking over the customer base. If this is the case, it is wise to include a non-competition clause in the business takeover contract. This stipulates that the selling party will not compete with the old company, for example by continuing similar activities and doing business with customers who were sold during the business acquisition. A non-competition clause in a business acquisition contract is often subject to a time limit, meaning that it only applies for a certain period of time.
Frequently asked questions about a business acquisition contract
Why is a business acquisition contract essential for limiting risks?
A well-drafted business acquisition contract is essential for limiting risks and creating clarity about the agreements between the buyer and seller. The contract specifies exactly what is being transferred and contains guarantees and indemnities that protect you, as the buyer, against hidden debts or legal claims, for example. It also legally secures price agreements, payment structures, transfer of ownership, liabilities and non-competition clauses. Without such a contract, there is a high risk that agreements will later be called into question or that you will be liable for obligations you were unaware of.
What are common pitfalls when drawing up a business acquisition contract?
There are several pitfalls to watch out for when drawing up a business acquisition contract. A common mistake is not describing exactly what is being acquired in sufficient detail. We also regularly see guarantees and indemnities being formulated in too general or too limited terms, leaving the buyer insufficiently protected against hidden risks. Furthermore, the absence of a clear non-competition clause or an unclear earn-out structure often leads to disputes after the transfer. Finally, the importance of good coordination with tax and legal advisers is sometimes underestimated, while it is precisely this cooperation that is crucial to avoid surprises.
Committed advice and guidance on mergers
The corporate lawyers at Fruytier Lawyers in Business have extensive experience and all the legal expertise required to guide you through mergers and acquisitions. With our knowledge, we can provide you with sound and targeted advice in the preliminary phase to help you avoid potential pitfalls. In addition, we assist you in drawing up confidentiality agreements, letters of intent, conducting due diligence investigations and drafting the company acquisition contract. For more information, please contact one of our specialists in mergers and acquisitions.