asset acquisitions - Jackson Walker LLP

Section 2.5 for a discussion of the allocation of the purchase price. The method of paymentmay include some combination of cash, debt, and stock and may also have a contingentcomponent based on future performance. For example, if a buyer does not have sufficientcash or wants to reduce its initial cash outlay, it could require that a portion of the purchaseprice be paid by a note. This method of payment, together with an escrow arrangement forindemnification claims, is reflected in Section 2.3 of the Model Agreement. If the method ofpayment includes a debt component, issues such as security, subordination, and post-closingcovenants will have to be resolved. Similarly, if the method of payment includes a stockcomponent, issues such as valuation, negative covenants and registration rights must beaddressed.If a buyer and a seller cannot agree on the value of the assets, they may make aportion of the purchase price contingent on the performance of the assets following theacquisition. The contingent portion of the purchase price (often called an “earnout”) iscommonly based on the assets’ earnings over a specified period of time following theacquisition. Although an earnout may bridge a gap between the buyer’s and the seller’s viewof the value of the assets, constructing an earnout raises many issues, including how earningswill be determined, the formula for calculating the payment amount and how that amountwill be paid (cash or stock), how the acquired businesses will be operated and who will havethe authority to make major decisions, and the effect of a sale of the buyer during the earnoutperiod. Resolving these issues may be more difficult than agreeing on a purchase price.The Model Agreement assumes that the parties have agreed upon a fixed price,subject only to an adjustment based on the difference between the Seller’s working capital onthe date of the Balance Sheet and the date of Closing (see Sections 2.8 and 2.9).2.4 LIABILITIES(a) Assumed Liabilities. On the Closing Date, but effective as of the Effective Time,Buyer shall assume and agree to discharge only the following Liabilities of Seller (the“Assumed Liabilities”):(i) any trade account payable reflected on the Interim Balance Sheet (other thana trade account payable to any Shareholder or a Related Person of Seller) whichremain unpaid at and are not delinquent as of the Effective Time;(ii) any trade account payable (other than a trade account payable to anyShareholder or a Related Person of Seller) that have been incurred by Seller in theOrdinary Course of Business between the date of the Interim Balance Sheet and theClosing Date which remains unpaid at and are not delinquent as of the EffectiveTime;(iii) any Liability to Seller’s customers incurred by Seller in the Ordinary Courseof Business for non-delinquent orders outstanding as of the Effective Time reflectedon Seller’s books (other than any Liability arising out of or relating to a Breachwhich occurred prior to the Effective Time);(iv) any Liability to Seller’s customers under written warranty agreements in theforms disclosed in Part 2.4(a)(iv) given by Seller to its customers in the Ordinary3148166v1- 47 -