Below are three of the top areas that we focus on when reviewing a letter of intent (“LOI”) in connection with a merger or acquisition (“M&A”).  These are also areas that we discuss with first-time sellers, who may not be aware of the various ways in which deals can be structured.

• How the Purchase Price and Purchase Price Adjustments are Determined. Will the purchase price be paid in a lump sum at closing or will it be structured as a portion paid at closing plus the potential of receiving an earnout or other deferred compensation in the future if specified contingencies are achieved?  Will it be paid in cash or a mixture of cash and stock?  Is there any holdback or escrow?  It is also important to understand what adjustments and assumptions were made when the parties arrived at the purchase price.  Among other things, you should understand what figures were relied upon and whether the calculations were made in accordance with GAAP (or, if not, what departures there were from GAAP), as these factors and methodologies can impact purchase price adjustments / true ups under the purchase agreement (this might sound like common sense advice, but you would be surprised at how many times we have encountered buyers and sellers disputing the methodology around how the purchase price was determined, and accordingly how any post-closing adjustments should be made).
• How the Earnout is Structured.  Earnouts can be beneficial to both the buyer and the seller, and have the potential of significantly aligning the parties’ interests from both an economic and relationship point of view.  However, they also can be complicated and require serious consideration as to how they should be structured.  Among other things, it is important to ask: what metrics will be used when determining the earnout?  For example, will it be based on the EBITDA of the company over a specified period of time?  If so, what EBITDA adjustments will be taken into account?  What multiple of EBITDA (or other applicable financial metric for the transaction) will be applied to the calculation?  Will the earnout be triggered upon hitting a specified financial threshold or will it be tied to satisfaction of a milestone, such as getting approval to distribute a specified type of drug?  When will the earnout be paid?  How will disputes around the calculation of the earnout be resolved?
• How the Closing Conditions are Drafted.  In addition to the stock/asset purchase agreement, the parties typically contemplate that other agreements will be entered into in connection with the transaction.  For example, the buyer may want the sellers and key employees to sign restrictive covenant agreements (non-compete, non-solicit of customers and non-hire of employees) – if so, the seller should contemplate discussing the scope of the restrictions with the buyer, including how long the restrictions will remain in place (one year post-closing?  Two years post-closing?  More?) and whether there will be any carveouts from the restrictions (i.e., activities that the seller wants to make clear are permitted).  The seller would also want to limit the list of individuals who are required to sign restrictive covenant agreements (or employment agreements) as a condition to closing – otherwise the door is open for those key employees to delay negotiations and, since their signature would be required for closing, they could use their leverage to ask for better terms.  Additionally, it is critical to determine whether there are any other conditions to closing that could provide the buyer with grounds to walk away from a transaction, including whether there is (i) a “diligence out” (whereby the buyer could terminate the deal if it is dissatisfied with the results of facts disclosed in due diligence examinations at any point prior to the closing), (ii) a milestone that must be achieved between signing and closing and (iii) any approvals that need to be obtained from third parties (including governmental approvals) in order to close the transaction.  To the extent some or all of the sellers or key employees are staying on with the buyer (whether due to receiving rollover or new equity, being hired as an employee or being appointed as a manager or director or otherwise) or there is an earnout component to the deal, it would behoove the sellers to discuss governance protections up front, such as consent rights on certain actions, in order to better protect themselves and their earnout post-closing.