Mergers and acquisitions are an integral part of company growth for both the acquirer and the acquiree. With big money and high stakes involved, these transactions are fertile ground for an unsophisticated party to get short-changed. Due diligence must be done before finalizing a merger or acquisition.
Legally, acquisitions present a host of issues that must be overcome. If you are about to enter into your first acquisition, this blog discusses some of the most significant points you need to consider.
1. Rationale
Why are you buying? How does the acquisition fit into your plan for growth and/or diversification? No matter how attractive a prospect or offer might be, it could hurt your business strategically and legally.
Start with how the acquisition is expected to impact your business immediately after the purchase. Then in six months, then a year, and even in 5 years. Will it grow your bottom line, are you merely eliminating competition, or do you think the funds can be used to help you in other ways?
If the company is not in the same line of business, how will the acquisition add value to what you are already selling your customers? If you have to find new customers for the new product, you will have to work a lot harder to make a profit on the deal.
2. Due Diligence
Successful acquisitions typically include full disclosure and open transfer of relevant records. The company being purchased should be sharing documents as requested, including corporate documents, employee records, financials, and performance data. As a side note, both parties must execute an NDA to protect the proprietary and confidential information being shared.
As you go along the due diligence process, you want to ask yourself, what am I buying? Is it the brand, customer base, supply chain, or a skilled employee team? You might be buying into a dying market, unsustainable product, or financial liabilities.
A great way to conduct the due diligence process is to hire a third party to do a thorough professional audit and present you with the findings. Debt, Accounts Receivables, and post-acquisition costs, such as severance packages and operational costs, should be factored into the decision-making process, among other things.
3. Human Capital
Human capital is one of the most valuable assets of any company. You need to decide what happens to the team in the company being bought. If you plan to have the acquired company continue to be more autonomous, you may choose to keep the current team intact as-is. If you plan on absorbing the acquired company into your own, you may decide to cut costs and release specific individuals to avoid redundancy.
Either way, you still need to prepare for the expected integration of entities (on some level) that may affect business processes and efficiency.
4. Existing Agreements
Customers expect to have consistent quality in the services and/or products they purchase. Or, in the case of services, at least until their contracts are up. This concept is especially true with tech startups.
Depending on the size of the acquired company and the clientele, you may need to obtain consent from the acquired company’s clients in order to continue providing services. In many commercial contracts, you will language regarding assignments, consents, and notices.
Also, suppose the acquirer’s company is a corporation. In that case, such company’s directors, shareholders, and/or major investors need to be notified and likely vote on the acquisition, depending on how the company is structured. With an LLC, the Members would typically vote on this type of transaction.
In both cases, depending on the nature and purpose of an acquisition, existing contracts could pose potentially fatal legal pitfalls you need to avoid.
5. The Acquisition Process
Acquisitions usually involve transactions spanning months or years. There are many issues to iron out, including the interests of the parties involved, issues raised on problematic areas, changes in market dynamics, legal and regulatory challenges, etc.
It would help if you had a structured acquisition process and schedule in place as a guide. For complex acquisitions such as those involving multinationals and companies with multiple business lines, it’s also a wise decision to bring on board experienced acquisition firms to manage parts of the process. These are usually teams of veteran lawyers, accountants, and finance professionals who can help oversee a smooth transaction.
6. Organizational Structure and Culture
Acquisitions often fail on account of a difference in management style and/or company culture. Things such as department autonomy, employee perks, organizational hierarchy, and other internal policies should be hammered out before you close on a deal or shortly after the closing.
Drastic changes to an existing company’s culture could have severe and unintended consequences that could make or break the acquisition.
7. Legal and Regulatory Requirements
Last but certainly not least, legal and regulatory requirements should be addressed. Depending on the nature of the industry and parties involved, there could be a large amount of federal/state regulatory oversight. These regulations could touch areas such as antitrust, consumer protection, taxation, employee rights, foreign investments, and more.
One should also consider the type of acquisition they move forward with. Most acquirers would favor an asset purchase, where they pick and choose which assets they are acquiring in the deal. Most acquirees would probably prefer the stock purchase (or membership purchase) arrangement. In a stock purchase, the acquirers are typically inserting themselves into the already existing company. As such, they are taking on its debts and liabilities.
An acquisition of any size should be handled with legal counsel. Depending on the intricacies, more than one firm may be involved.
Conclusion
Acquisitions should be carried out in good faith. However, due to nuances, many instances arise when one party gets the short end of the stick. The experience is exhausting for everyone, but considering these seven points could help you make a more informed decision that works for you and your business.
Contact our corporate and business attorneys today to learn more about how they can help you acquire and/or sell a business.