The Deal RoomOne of the most significant points in a transaction may be one of the most overlooked – the question of who will prepare the first draft of the underlying agreement.  It is generally always a good strategic decision to prepare the first draft of a purchase agreement, regardless of whether you are the buyer or the seller.

While on the surface, many purchase agreements may look the same (they all contain basic deal terms, representations and warranties, pre-closing covenants, closing conditions, deliveries, and indemnification), good transactional attorneys have quite different starting points to use if their client is the seller or the buyer.  A seller-favorable document approaches many provisions very differently from a buyer-favorable document.

Using the right starting point is a great way to put yourself in the strongest possible position at the start of a deal.  And who doesn’t want to start off a transaction in the best position rather than from a weaker position? 

When business points come up during negotiations after drafts are exchanged, parties of course understand they should negotiate to try to achieve the best terms they can.  The question of which party does the initial draft should be treated no differently than any other business point in a transaction.

For example, if a party is the seller, their attorneys can draft an appropriately limited set of reps and warranties that cover the basics but without going too far.  If a buyer were to prepare that same first draft, the reps requested from the seller would be far more extensive, opening the seller to a greater risk of breaches, indemnification claims and more internal due diligence.  Similarly, buyer and seller positions on topics like environmental remediation, risk of loss and scope of indemnification may be quite different.  You may even be able get certain provisions into a document in the first draft that you would never be able to get if you were marking up someone else’s draft.

We also find it to be more efficient for clients when we prepare the first draft.  In the long run, investing the time to put forth a first draft that best advances the client’s position tends to be cheaper than reviewing and marking up someone else’s draft who has different goals than you do.

So next time when you are discussing with the counterparty to a proposed transaction the question of who will prepare the first draft, bear in mind it’s not a throwaway question.  It’s a strategic decision that can have a significant impact on the contract you ultimately sign.

Related Posts: