The goal of many entrepreneurs is to merge with or be acquired by another company. They have grown their business to the point where it is attractive enough for another company to want to own it or to be part of it, and profitable enough for the financial stakeholders to see the benefit of all their hard work. Preparing for the merger or acquisition (M/A) so everything goes smoothly and successfully demands planning and focus in three main areas: legal, financial, and process. They are all critically important to get to the finish line, and to some extent, they merge with each other. Let us discuss the basics of each step.
1. Basic Preparation
This sounds obvious, but many M/As fail because “something” is discovered or is missed. The result is the other company walks away. This is more common where the other entity is publicly traded. It is essential, therefore, to make sure all taxes have been filed, all company financials are in order, and all interested parties, such as banks, outside lenders, accountant, tax advisor, and lawyer are actively involved as soon as possible.
2. Keep Stakeholders Involved and Positive in the Merger or Acquisition
Senior managers and other stakeholders must be positive about the M/A to minimize the risk of disagreement, delay, or failure later in the negotiation.
3. Get Major Customers and Clients Onboard Your Merger/Acquisition
Market share, turnover, and profitability drive mergers and acquisitions. It is essential that the main customers and clients see the M/A as positive to them, so they want to continue buying and growing their purchase orders.
4. Get the Public Narrative About Your M/A in Place Early
The M/A will be newsworthy. You also want to ensure as far as possible what newspapers, radio and TV, and social media say. Good publicity should boost post M/A business. Staff should furthermore see the M/A as good for them and their future.
5. Involve the Experts
Financial and legal experts are critical to ensuring a successful outcome. This may be a first for the company’s C-Suite and other senior staff, so it is crucial to be able to rely on expert counsel based on the attorney’s years of experience. Particulars to get perfectly correct include:
i. Non-Disclosure Agreement
M/As can fail, so it is essential that it doesn’t because “word gets out” that an M/A is in the works. Uncertainty damages business. The buying company owes it to its own stakeholders to make the M/A as cheap as possible, so secrecy matters.
ii. Non-Solicitation Agreement
The acquiring company must commit to not attempt to recruit company staff, especially critically important staff members who may be the difference between a successful M/A, and a derailment.
iii. Letter of Intent
It is essential to prove commitment by the acquiring company. They may also be considering other possible M/A candidates. Having a signed letter is important; knowing what should go in the letter is more important. The letter of intent should, for example, include an exclusivity period to keep the buyer fully committed until the details of the M/A are clear. Such details include: price; warranties; who and what will be indemnified on what terms and for how long; how to treat escrowed monies; and how to treat current balance sheet credit and debit items, etc.
iv. Disclosure Schedule
Many topics will have to be fully disclosed in a timely order. They include, for example, imminent contracts with buyers and vendors; current contracts; intellectual property held; exempt items which will not be part of the M/A; and any outstanding or potential litigation.
v. Third Party Consent
Property and equipment leases, for example, may need approval for change of control.
vi. Stock Options
Will the acquiring company take the options, and only count vested options as part of the price? Will options be accelerated? On what basis, and with what timescale? Furthermore, can any future options be cancelled and not honored?
vii. Escrow Holdbacks
How will any indemnification claims be dealt with? Also, how long will escrow holdbacks exist?
viii. Conditions and Timescale to Close
The devil is in the detail! Everyone involved must know exactly what conditions must be satisfied to close, and when the closing will take place after satisfaction
Mergers and acquisitions are exciting. They are also complex. The financial and legal aspects merge with the process followed. To maximize the likelihood of a smooth and successful M/A, companies on both sides should ensure they are supported by legal expertise of the highest caliber. To discuss your M/A project please contact us.
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