What are the risks associated with a stock purchase transaction and how should you protect yourself? A stock purchase agreement is the contract document which governs the acquisition of a corporation through a stock purchase. This important document not only transfers the title and sale of the shares of the seller’s corporation, it should clearly establish all associated details and the challenges which might arise.
The experienced mergers and acquisitions attorneys at the Watkins Firm have more than four decades of experience in thousands of stock purchase transactions. We understand the nuances associated with “the deal” and represent our clients while respecting the nature of the transaction and associated communications with all parties.
Primary Risks and Protective Strategies
The primary risks to the buyer are overpaying (over valuation) and contingent liability. The strongest protections against these risks are borne out thorough comprehensive and effective due diligence and a well-crafted stock purchase agreement that clearly establishes the risks associated with a stock purchase transaction and the measures taken to reduce or eliminate those risks.
For example, it is prudent to protect the buyer with a “purchase price adjustment” clause or terms. If there are unforeseeable risks or the financials don’t bear out after the transaction there should be a hold back account from the seller to offset these developments.
Usually the financials of the company to be acquired are not fully completed until weeks after closing. Negative information or additional borrowing during the transition period affects the value of the underlying company and therefore the purchase price. These may be based upon several factors including equity to debt ratio, the value of specific assets and even profit and loss statements.
Another common theme involves “Earn-Outs.” You want the owners of the company you are buying to ensure business continues and existing Goodwill transfers to the new owners. Target performance metrics may be established for specific post-closing dates which reward the seller when the company achieves or exceeds these goals.
Protect Against the Risks Associated with a Stock Purchase Transaction
The “Representations and Warranties” is an extensively negotiated and crucial section of the stock purchase transaction contract and supporting documents. The representation and warranties provide risk allocation between the buyer and the seller and serve as the basis for indemnification claims in the case of a breach of contract. The seller wants to ensure the buyer has the funds and will complete the purchase, while the buyer wants to ensure all of the information and financials provided about the corporation are accurate and forthright.
Your Mergers and Acquisitions attorneys at the Watkins Firm have successfully guided our clients through thousands and thousands of M & A transactions. Put our more than 40 years of experience in these comprehensive business and financial transactions to work for your side of the equation.
The risks associated with a stock purchase transaction are high, but the experienced attorneys at the Watkins Firm protect our clients while working to ensure a smooth transaction. We invite you to review our recent podcast Episode 13 – Mergers and Acquisitions as well as the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.
