Sale and Purchase Agreements (SPAs) in Mergers and Acquisitions

In the first episode of M&A Deconstructed Series Two, mergers and acquisitions experts Nick Davies and Justin Levine discuss Sale and Purchase Agreements as they continue their mission to demystify the entire M&A process.

In addition to covering the basics, such as ‘what is an SPA?’ and ‘What should it contain?’, the two M&A specialists cover the importance of instructing an experienced M&A solicitor to interpret the detail of an agreement and consider the difference between an SPA and an asset purchase agreement (APA).

Take a look at this in-depth discussion in the video or read through the transcript below…

Video sub-topic timestamps:

00:00 – Introducing Sale and Purchase Agreements (SPAs)
01:00 –  What is a Sale and Purchase Agreement (SPA)?
01:40 –  What should an SPA contain?
04:00 – Making an SPA more manageable
04:50 – How long is a sale and purchase agreement?
06:00 – Importance of instructing M&A professionals
07:13 – Forms of consideration
10:10 – Difference between asset and share sales

Video Transcription

Nick:
Morning, Justin.

Justin:
Yeah. Morning, Nick. So welcome back to our M&A Deconstructed series where we are aiming, our goal is to try and demystify the sale process of selling a company.

Justin:
So we’ve already done a handful of videos where we’ve touched on the base elements of selling a company, and now we’re going to get into some of the technical stuff. And today we’re going to be talking about the Sale & Purchase Agreements.

Nick:
Okay. The SPA, yeah.

Justin:
Yeah, the SPA. So just as a quick recap with the seller, and we’re talking to people who are selling a company, a business, if they have negotiated a deal with a potential buyer, there’s going to be a part of the process where they have brought the legal team into the process.

Nick:
Yes.

Justin:
And that will be, of course, Steele Raymond.

Nick:
Fingers crossed.

Justin:
And your good self.

Nick:
Yeah.

What is a Sale and Purchase Agreement (SPA)?

Justin:
So of course, the notion that there is a Sale & Purchase Agreement for many company owners, they’re simply not going to be aware, or it’s unlikely they’re going to be aware of what that document is.

Nick:
Yeah, sure.

Justin:
What it contains. So perhaps you just maybe give us a quick overview, what is a Sale & Purchase Agreement?

Nick:
Yeah, sure. So, I mean, that sort of document is typically referred to as an SPA, as you say, it’s a Share Sale & Purchase Agreement. The point at which that document comes into circulation in a sales process is beyond the point where the parties, the buyer and the seller, believe they’ve agreed a deal.

What should a Sale and Purchase Agreement contain?

Nick:
We’ve talked previously about heads of terms, and the heads of terms should capture some of, not everything, some of what is going to be in the Share Sale & Purchase Agreement.

For someone who hasn’t been through an M&A transaction before, it can be a daunting document, it can be quite a long document. There is a lot of content. The document should really set out all of the terms that the parties agree to, on the basis which they agree to buy and sell the shares in the company.

Nick:
So fundamentally, you need to get the parties in there. You need to know who the buyer and the seller are. You need to identify them correctly. You need to set out what the price is going to be, how the price is going to be paid. You may have all cash on completion. You may have some deferred consideration. You may have different forms of consideration, such as low notes, consideration of shares.

There may also be a mechanism for adjustment of the price. And that’s fairly common where a buyer says, “Well, I’m buying your company assuming certain levels of cash or debt.” And then you have an exercise after completion where you come back and just verify those numbers, that’s called completion accounts. That might be something we talk about separately.

Nick:
So the SPA will contain that mechanism for adjusting the price. And the SPA will also contain detail about warranties, indemnities to cover areas of risk, which our buyer’s identified. There will be things such as restrictive covenants, which say that the seller can’t go off and compete with the company after completion. And there’ll be a variety of schedules.

Nick:
So if the company operates from a premises or owns a premises, or has a lease hold premises, details will be set out. There will be schedules of warranties, which I know we’re going to talk about separately.

There will be schedules about things like what IP or intellectual property does the company have, or its IT systems? What are the completion deliverables? And those are all of the sort of what we call ancillary documents. Resignations of directors, appointment of directors, change of registered office address, production on completion of the share certificates, banking mandates, credit cards, keys, company documents, et cetera. So there’s a lot of content in there.

Nick:
And to someone who hasn’t seen that sort of document before, it can be a little bit overwhelming. I think that the key is to break it down into parts. Look at the front end. What are the operative provisions? Deal with those. Separately look at the schedules, look at the warranties and deal with those. So, that’s a sort of summary of what a typical SPA might include.

Justin:
Yeah. And I think it’s the way I look at it, explain to clients, it’s the legal document that is the binding legal-

Nick:
Absolutely.

Justin:
… document that-

Nick:
It governs the relationship between the parties in respect of that sale. So if there’s a question after completion about, well, should A or B have done this or that? The document you’re going to go back and refer to is the SPA.

How long should a Sale and Purchase Agreement be?

Justin:
That’s right. I think what surprises me, when I speak to my clients and they come to this process, upstream of that three months, say, I’ll explain the Selling Purchase Agreement is a detailed document. It’s often quite lengthy. I don’t know what the longest document you’ve ever seen, but I’m seeing 30 up to 100 pages sometimes.

Nick:
Yeah, definitely. I mean, it can depend on deal value. It doesn’t have to depend on deal value, but if a buyer is spending more money, they may want more protection and more detail. So certainly we see SPAs on very large transactions, 120, 140 pages. Really for smaller transactions beneath 10 million pounds, you shouldn’t be getting up to that level in my view. You should be seeing things which are 60 or 70 pages, or maybe less.

Nick:
But again, if a particular company has, let’s take, for example, a multi-channel retail business, High Street retail, travel agent, perhaps. If you’re buying a company of that type, and let’s say it’s got 60 properties, you might have one page summary of each property in the SPA. It may be dealt with separately, but if it’s in the SPA. So there are different factors in each deal, which can influence and dictate the length of the SPA.

Nick:
So it’s a bit of a how long is a piece of string, really?

The Importance of instructing M&A professionals

Justin:
Yeah. And I think that from my side, having done quite a number of projects, every time I come to an SPA and reread it, despite a reasonable level of commercial knowledge, I still look at it and it requires a lawyer to interpret a large body of it. And that’s having done 10 years or more of transactions.

Justin:
It requires specialists. And I think that’s one of the things that I guide my clients to do, is there’s a fundamental difference between a solicitor that’s dealing with perhaps conveyancing, for example, on commercial property, and a corporate lawyer that is dealing with M&A transactions.

Justin:
And I don’t know how you feel about it. But my viewpoint having that experience is saying, “Always hire a specialist in that field to deal with that point, the SPA.”

Nick:
Yeah. I think that’s right. I think you want somebody who has seen it before, who has done it before, who is part of a wide and broad team who have also seen it before and done it before, because you get the benefit of that experience. Some SPAs on very simple and small transactions, probably somebody with a decent level of commercial knowledge can work their way through the vast majority of it.

Purchase and Sale Agreement forms of consideration

Nick:
I think that as the deals get more complex, particularly around different forms of consideration, we’ve seen rolled over consideration shares where the shares are actually interest issued in an American LLP. You see low notes, which are subordinated to senior debt. You can see earnouts, which are quite often very complex because there are requirements as to how the business should be run, then there’re requirements as to how the business is measured in terms of its performance. And then you have to run all of that through a formula to work out what the earnout consideration is. So earnouts can become quite complicated.

Nick:
I think get the best advice. You’re only probably going to… most people are going to do this once. And I think that you don’t what we call sellers remorse, where you’ve gone through the process and think, well, yes, we’ve got through it, that’s a relief, that you look back and think, well, wonder if we could have done that better. I think do it properly, do it once and get the best result you can get.

Justin:
But I think in my view, it’s partly about getting the experience guide, if you like. I’ll use that as a term for, it could be the corporate finance lead, the lawyer. I mean, when you’re talking about the SPA being 50 to 150 pages, for example, from my viewpoint, getting the essence of the deal, the basic foundations of the deal agreed at heads of terms, is really important.

Nick:
Absolutely.

Justin:
It’s often a balance as to how much you put in the heads that reflects what might go into the SPA. But the worst, I won’t call it a worst case scenario, for example, but getting to the SPA and then reentering a negotiation on its fundamentals, the foundations of the deal, is always dangerous territory in my view.

Nick:
You don’t want to be there. I mean, I think I’ve used the phrase in the previous video. On heads of terms, you want enough detail to understand what the deal is, but don’t do the deal in the heads. Otherwise, you’re going to end up spending one, two, three months negotiating heads of terms. That doesn’t help anybody. You’ve got to capture the key points and then you’ve got to move on.

Nick:
You do want, when you are negotiating the SPA, to be able to refer back to a substantive set of heads of terms, which capture all the key commercial points. So that as you say, you’re not then renegotiating the deal again later.

There will be things that come up on the SPA, which are not captured in the heads. That’s part for the course. You’re not going to, for example, specify the exact warranty language in the heads of terms, you’re just not going to be able to do that.

Nick:
So there will be some negotiation in the SPA, but you should not be coming back at the SPA stage to reviewing the price unless something’s come up in due diligence. You should have established your warranty, De Minimis thresholds.

You should have established your covenant length. You should have established if anyone’s having any new employment or consultancy. These are the sort of things you should captured and which make drafting the SPA easier and mean that the legal teams have to spend less time. Less time means less cost. Most clients are interested in that. So get the heads right, makes the SPA easier.

What is the difference between a sales and purchase agreement and an asset purchase agreement?

Justin:
What is the difference? We’ve talked about an SPA. What’s the difference between an SPA and an APA, an Asset Purchase Agreement?

Nick:
Yeah, sure. So an SPA, Share Sale & Purchase Agreement, someone is buying, someone is selling shares in a limited company. If we’re talking about an asset purchase agreement, it could be that a group of individuals or an individual or a company are selling the business and assets, the trade outside of a limited company shell to the buyer. And the buyer could be using a limited company for that purchase.

Nick:
So it’s a similar form of agreement in terms of what’s covered. When you’re buying assets, you are not buying things like accounting and tax history. You are taking on employees, you are taking on contracts, you are taking on the business, the goodwill, the brand, the name.

So there are different things covered, but fundamentally the documents are designed to do the same thing. They are there to help transition the ownership of, in the SPAs case, shares, and in the APAs case, the business and the assets from a seller to a buyer.

Justin:
Understood. No, that’s fine. Thank you. I think one aspect, which we will cover in a separate video, and it’s an important part of the SPA, and that are the representations, the warranties, indemnities, and of course the very famous disclosure letter.

Nick:
Yeah.

Justin:
And those are all, those make up parts of SPA, but they are extremely important for the seller. But I think we’ll cover that in a separate video. So I think for the time being, I think we’ve covered off the SPA and the APA and given a nice cover for that.

Nick:
Sounds good. Look forward to discussing warranties and reps. Thanks, Justin.

Justin:
Thanks, Nick.

_ _ _ _ _ _ _ _ _ _ _ _

Take a look at Series One of M&A Deconstructed

As part of this in-depth series, other topics discussed include:

• What is EBITDA?
• What are Heads of Terms?
• Completion Accounts vs Locked Box Mechanism
• What is Due Diligence in Mergers and Acquisitions?
• The difference between a Share Sale and an Asset Sale?

Connect with the M&A experts

Justin Levine, Managing Director, The NonExec Limited M&A Boutique 
Justin leads a boutique exit advisory firm specialising in manufacturing, technology, IT, digital, healthcare, wholesale and distribution markets. With the support of a 15-strong virtual team of analysts and researchers, he helps private business owners with growth and exit strategies. Connect with Justin >

Nick Davies, Partner and Specialist M&A Solicitor, Steele Raymond LLP
Nick acts for a wide range of business clients across various sectors, advising on complex corporate transactions including company sales, purchases and mergers. Nick also advises on on mergers, de-mergers and re-organisation. Connect with Nick >

Make an Enquiry

If you have any questions regarding your business, a business exit, a merger or any other corporate legal query, please contact Nick Davies on 01202 294566 or email [email protected]