After the letter of intent has been signed by the buyer and seller of a business, the negotiation of the legally binding transaction documents begins. Typically, the buyer's lawyer will prepare the initial draft of the asset or share purchase agreement since it is the buyer who will be concerned with obtaining appropriate representations, warranties and indemnities relating to the business for its protection. Likewise, the buyer will typically prepare the first drafts of the post-closing non-competition agreement, and any employment or consulting agreement to be entered into by the seller.
The negotiation of these documents will typically take place over a period of several weeks while the buyer's due diligence review and analysis of the business continues and the documents may change depending on the results of that due diligence. The seller and its representatives will review and negotiate the agreements with a view to maximizing the seller's return and obtaining protection for any part of the purchase price which is proposed to be paid in future, in addition to trying to minimize his liabilities under the representations, warranties and indemnities. The seller will be trying to limit the scope of representations made about the business to factual matters of which he is aware and which can be clearly confirmed to be accurate and also to limit the maximum dollar amount of his liability for future claims under the representations, warranties and indemnities. The buyer will typically try to obtain protection against future liabilities of the business which arise out of events which occur prior to closing even if they are not known at the time of closing. There will also usually be a negotiation as to whether there will be a purchase price holdback as security for these future claims.
The manner in which the negotiation proceeds will depend on the parties' preferences. Usually the seller will review the draft documents with its lawyer and the first response will be made by that lawyer on the seller's behalf, either by way of contacting the buyer's lawyer directly to discuss its comments or by way of doing a markup of the draft agreements which amends them to a form which would be acceptable to the seller. This latter approach has the advantage of being clear and comprehensive as to the seller's position although it does not facilitate a clear exchange of information between the seller's and buyer's representatives as to each party's thinking behind a particular issue, which would possibly then lead to a discussion which could resolve the issue. It is still usually preferable to have the seller's position set out in a comprehensive markup of the documents at this stage of the process.
After the initial positions on the transaction documents have been exchanged by the parties, in some cases the next step involves a further and continuing exchange of marked up documents with a view to reducing the number of outstanding issues by way of each party accepting some of the positions of the other party, modifying that party's position to a position which it believes may be acceptable to both parties and continuing to press the issues where there is still disagreement. Although this has the advantages noted above, it may be more efficient at this stage to arrange a meeting of the parties and their legal and accounting representatives to review the documents and try to reach agreement on the outstanding issues. An extended exchange of marked up documents can delay a resolution of outstanding issues as each party reiterates its position on certain issues without perhaps fully understanding the other party's position or exploring ways to bridge the gap between the parties while still satisfying the objectives of both parties.
It is important to keep the momentum moving on the sale transaction process both because the parties typically have other important activities that they are working on concurrently with the sale process which involve considerable time commitments and because a transaction can fall apart for lack of drive if it is not actively advancing and thereby encouraging the parties to proceed to a successful conclusion. The shorter the period of the sale process the better for both parties, while still completing all required negotiations, obtaining any required financing and obtaining any necessary third party or governmental approvals.