PSA: M&A Stands for “Mergers & Acquisitions”, not “Misunderstandings & Aggravation”

PSA: M&A Stands for “Mergers & Acquisitions”, not “Misunderstandings & Aggravation”

If it feels like we skipped a few chapters, it’s because we did . . . and also because January was eternal. So far, we’ve covered topics like how to set up your business (happy belated 1-year anniversary to this Business Blog) and how to approach certain key agreements, but how about selling your business or acquiring another? That’s right, M&Ms sorry, M&As (we skipped lunch).

Spoiler alert: if you’re looking to buy, there are a few basic things you need to figure out before getting into formal negotiations, and if you’re looking to sell – it’s never too early to have an exit plan. These transactions require just as much detail, care, and planning as every other aspect of your business. Grab some candy-coated chocolate and let’s get into it, shall we?

Yes, You Really Should Draft a Letter of Intent

A letter of intent, or “LOI,” saves you time and money. Plain and simple.

To back up, an LOI is basically a one or two-page document that lays out the key terms of an M&A deal. For an acquisition, it includes basic terms like the purchase price and payment terms, post-closing support, non-competes, closing conditions, and anything else that the parties consider dealbreakers. Most of the time it’s non-binding, but the main goal is to provide a general framework for the deal. It’s how the parties show each other that they mean business (figuratively and literally). Here’s how things play out when an LOI (even just a quick email memorializing the main terms) is not in place: the parties spend hours of time and legal fees negotiating an agreement only to find out, maybe even after weeks of discussions and drafting, that the other party will never agree to a deal-breaking term. What a waste of brainpower and money.

So, what do you do? Lay it all out on the table, ensure it works for both parties, sign an LOI, and your attorneys will then have a clear roadmap to help them draft the underlying purchase agreement. “Measure twice, cut once” kind of thing.

And a quick note here on the purchase price – your business is invaluable to us too . . . but really . . . if you haven’t aligned on valuation at this stage, get back to basics and figure it out before sinking too much time into negotiations.

Stock Purchase or Asset Purchase?

This should be included in the LOI but it’s enough of a concern that it’s worthy of its own section. Before buying or selling a business, make sure you confirm if the transaction will be a stock purchase or an asset purchase. We like to use the following analogy: are you buying the grocery store and everything in it, or rolling up your sleeves, grabbing a shopping cart, and choosing what you want from the shelves (cherry-picking the assets you want)? If it’s the former, it’s a stock purchase, if the latter, it’s an asset purchase. Each structure has its own pros and cons, and your CPA may prefer one or the other for tax purposes, but as the attorneys, we’re looking at liability. In an asset purchase, because you’re mindful about what you are/aren’t acquiring, assigning, or taking over, and you’re likely doing so with an entirely separate entity, there is a clear dividing line between buyer and seller. So it’s easier for the buyer to avoid seller’s liabilities.

In a stock purchase, the entity stays the same, but the owners are replaced. The buyer literally steps into the shoes of the seller. The pre- and post-closing transition is generally a bit easier since you may not need to have formal assignment agreements, formal transfers of licenses, or intellectual property. Nothing has changed except for ownership. As a result, the business can often continue with minimal interruption or third-party negotiations. That being said, there’s more of a risk of unknown liabilities tied to the entity itself creeping up post-closing. Which brings us to our next point: due diligence.

Due Diligence – It’s Not a One-Way Street

Due diligence is one of the most important considerations in any M&A transaction, yet sometimes overlooked on both sides. Before you have serious conversations about a potential sale or acquisition, do some basic, preliminary due diligence, and once you’re sure that you have a serious, financially viable buyer (or a solid target entity), do some more in-depth due diligence. For example, if you’re a seller, make sure the buyer has the requisite funds and financial stability. If you’re a buyer, make sure you’re buying the assets free and clear, and that there aren’t potential creditors (or plaintiffs) hiding in the weeds. While representations and warranties can help shift risk and liability here, you’d rather avoid the liabilities altogether as opposed to having to sue someone to clean up a mess that you had the opportunity to avoid.

It all boils down to this: mitigating risk. That loan that was paid off 10 years ago? Maybe the bank forgot to file a UCC-1 termination. Trust the process, but don’t be too trusting – do your due diligence.

You Closed – Yay! Now What?

A “deal” doesn’t always end at closing. Some buyers require that the prior owner stay on for a bit post-closing to assist with the transition. How much will the prior owner get paid? How long will this transition period last? Will the prior owner be an independent contractor or an employee? Who will handle ongoing projects? Sometimes parties are so focused on what happens prior to closing and at closing, that they fail to adequately consider what happens post-closing. If you know for a fact that you want to sell your business today, and be retired on a beach in Florida tomorrow, make sure the buyer knows that – and better yet, include that in your LOI.

As much as we can say so much more here, information overload is real. Hope this mostly clears up the ever-elusive M&A landscape (at least the “acquisitions” part of it, we’ll handle mergers next), but in the meantime: as always, if you’ve got questions, you know we’ve got answers!

~ The W + K Team