Definitive Agreement
A definitive agreement is an essential part of any transaction involving the sale of business assets or stock of a corporation. This document defines in detail all the terms of the purchase and is usually prepared by the acquirer’s legal counsel. The seller’s legal team will make suggested changes.

The closing occurs once the parties agree on the terms of the definitive agreement and they have satisfied or waived all of the conditions. In some cases, the definitive agreement is signed at the same time as the closing. Other times, the parties sign the definitive agreement before the closing, and the closing itself occurs once the closing conditions have been satisfied or waived.

There are multiple items that are negotiated in the definitive agreement. Some of these include:
 
Purchase price. In most cases, the seller should get professional assistance from an investment banker or valuation professional in determining the purchase price.

Payment terms. The acquirer may try to defer a portion of the purchase price and offset from the payment of the deferred portion any claims that might arise after the closing under the contract’s indemnification provisions. If this happens, the seller should consider asking for provisions respecting security and guaranty of payment.

Representations and warranties. Representations are statements about the current status of the business or its operations. Warranties guarantee the truth of the statements. Breached representations and warranties are common causes of litigation.

The most common representations and warranties include:

• Corporate organization, authority, and capitalization
• Assets
• Liabilities
• Financial statements
• Taxes
• Contracts, leases, and other commitments
• Employment matters
• Compliance with laws and litigation
• Product liability
• Environmental protection

Pre-closing covenants and conditions. Pre-closing covenants are essentially promises to do (or not do) something during the period between the signing of the acquisition agreement and the closing.

There are two types of pre-closing covenants: negative covenants and affirmative covenants.

Negative covenants limit or completely prohibit the seller from taking certain actions unless the acquirer agrees. Such covenants prevent the seller from changing the business that the acquirer expects to buy at the closing. Examples of negative covenants include:

• Not changing accounting methods or practices
• Not entering into transactions or incurring liabilities outside the ordinary course of business or in excess of certain amounts
• Not paying dividends or making other distributions to stockholders
• Not amending or terminating contracts
• Not making capital expenditures
• Not transferring assets
• Not releasing claims or waiving rights
• Not doing anything that would make the seller’s representations and warranties untrue

Affirmative covenants specify the actions the seller or the acquirer must take before closing. Examples of negative covenants include:

• Letting the acquirer have full access to the seller’s books, records, and other properties
• Attaining the necessary board and stockholder approvals and third party consents
• Submitting required governmental filings and getting needed governmental approvals

Post-closing covenants. The contract will contain certain obligations for the parties following the closing. Among other things, these include indemnification provisions, non-compete provisions, confidentiality agreements, and consulting arrangements.