Articles Posted in Mergers & Acquisitions

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An important step in the business acquisition process is determining the true value of the business to ensure you are paying an appropriate price. Valuation of a business can be complicated and can depend on the type of company in question, your goals, and many other factors. While this process may seem daunting, an experienced business lawyer can help to identify steps to take and help you decide whether a price is right. The following are some of the issues to consider when evaluating the price of an acquisition.

Examine the Current State of the Business

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There are many aspects of a business that should be closely examined before an offer is made, including, but not limited to:

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While many well-known businesses are either corporations or limited liability companies, partnerships remain a common and savvy business entity selection. In fact, some of the biggest names in tech—Apple, Microsoft, and Google—started out as partnerships.

What is a Partnership?

cooperation
Partnerships exist whenever there is a cooperative endeavor of two or more people, entities, or some combination thereof, to provide a product or service. The main characteristic of any partnership is that the partners share in the profits and losses of the business.

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Many business owners do not hire an experienced attorney for several reasons. Some believe they cannot afford it and others may believe there is no need for a lawyer unless a legal conflict arises. However, it is much more resource-effective (time, energy, and money) to have the guidance of a skilled business lawyer from the very start. Doing so can avoid costly litigation in the first place and will allow you to focus on your business operations and not on a legal case. The following are only some examples of how hiring a business attorney can help to avoid litigation.

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Business contracts – Businesses involve many different kinds of contracts, whether they are with fellow owners, suppliers, clients, or any other party. You may not recognize that a particular contract has unfair or adverse provisions that may leave your business vulnerable to losses or liability. Every single contract you consider signing should be carefully drafted, reviewed, and negotiated by a knowledgeable lawyer to protect your interests and avoid legal liability.

Compliance with business laws – California has a great number of laws that are relevant to businesses, and compliance is essential to avoid costly fines or legal conflicts. Such laws can regulate business formation, licenses, permits, zoning, taxes, employees, and many other issues. As a business owner, it may be challenging for you to identify all relevant laws and to ensure that you comply with them. An experienced attorney will know what steps you need to take to comply with necessary laws.

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Startups centered around a technological development or product are highly popular in this day and age—and for good reason. Companies such as Apple or Facebook originated in garages or dorm rooms and are now each valued at hundreds of billions of dollars. Even if you are not a technical person and know nothing about programming or coding, you can still start a successful tech startup, as evidenced by companies such as Pandora. It is not surprising that individuals are continually trying to bring the next big idea to life and start their own tech company.

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However, like any other type of business, there are many legal concerns for tech startups. One highly important concern is how to properly protect your intellectual property (IP). A novel and viable idea is generally the heart of a tech startup and you do not want to risk your success by failing to adequately protect your idea. The following are only some IP concerns that may be relevant to your tech startup.

Choosing the right type of IP protection

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Too many startups fail to successfully get off the ground because of decisions that result in inadequate financing. As a founder of a startup, you can have a completely viable idea and still fail due to financing mistakes. For this reason, it is important to understand the different types of financing appropriate at different stages of your business. Financing can be complicated and it is always helpful to consult with a skilled business attorney who can evaluate your financing needs and provide valuable advice.

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One type of financing used by startups is called “mezzanine financing.” The name is appropriate because this type of financing is in the middle between equity and traditional bank debt. Your business is less leveraged because there is no hard collateral to mezzanine investors, though many charge more interest than a bank loan. On the other hand, you will give up less control of your company than you will if you pursue additional equity funding.

When is mezzanine financing appropriate?

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Many startups in the tech sector are idea-rich and cash-poor, meaning that their most valuable (and often only) asset is their intellectual property that may have the potential to be worth a substantial amount of money. While some startups are able to move their ideas from concept to deployment with relatively little labor involved, many of these ideas require the assistance of developers, programmers, engineers, and marketers, all of whom are skilled professionals who can easily command salaries well into the hundreds of thousands of dollars per year.

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For this reason, many startups are faced with the issue of how to pay their employees during the development and launch phase, before they are generating any revenue. Of course, one option is to borrow the money or to seek investors – a solution that has significant pros and cons which should be considered. Another very popular option is to offer employees equity shares in a company in lieu of cash compensation. In some cases, this may take the form of equity for a lower salary than they would normally expect, while in others an equity share may be the only compensation they receive.

There are many issues that tech entrepreneurs and founders should consider when offering equity as compensation. These include the following:

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A comprehensive evaluation of a target company is a critical component of any successful corporate acquisition. Often referred to as a “due diligence evaluation” or “due diligence review,” this process involves fully evaluating the company that is being acquired (the target) in terms of its assets, liabilities, litigation risks, intellectual property matters, as well as other issues that could have an impact on the feasibility and advisability of a particular acquisition.

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The most effective way to ensure that a thorough due diligence investigation is conducted is to retain legal counsel that is familiar with representing buyers in mergers & acquisitions. Some of the most important issues to address in a due diligence review of a potential corporate acquisition are discussed below.

  • The target company’s financial matters – Issues such as financial statements, liabilities, margins, future projections, and potential capital expenditures should all be fully evaluated. This is often the first aspect of due diligence.
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A corporate merger is a transaction in which two or more companies combine to form one entity. Due to the complexity of merger transactions, it is highly recommended that anyone contemplating entering into such a transaction retain legal counsel. Here are three examples of how an attorney can assist in a corporate merger.

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Mergers can occur in a variety of ways such as a reverse merger, horizontal merger or vertical merger with consideration being made with stock, cash, a combination of both and other variations. Each of these merger structures have various legal and tax implications that are often significant. For this reason, the advice of a skilled attorney is critical to structuring a merger transaction in the most beneficial way possible.

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Enforceable contracts that accurately describe an agreement between the parties are essential to any business, regardless of industry. Contracts arise in many relationships, including with partners, businesses, suppliers, employees, and client or customers, and a company of even moderate size could easily have thousands of contracts with various parties. For this reason, implementing a system to manage contracts and ensure compliance can significantly improve efficiency, improve compliance, and reduce the risk of incurring legal liability that can arise from contract disputes. In addition, an effective contract management system can help automate certain tasks, significantly reducing the risk of human error resulting in a costly dispute. Below are 4 ways in which implementing a contract management system can help businesses in every aspect of the contract lifecycle management process.

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  • Keep all contracts in a central repository – This benefit may seem simple, but consider the inefficiency involved in an employee searching through files upon files for a contract that may have been executed years ago. An effective contract management system can keep a copy of the contract itself while also summarizing key facts regarding the agreement in a way in which they are easily accessible to those searching.
  • Create a database of standard agreement and pre-approved substitutions – There is no need to reinvent the wheel every time your company enters into a new agreement. Creating a standardized contract for use in recurring situations as well as standard substitutions that are pre-approved for use can significantly improve efficiency in contract drafting and execution.
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Selling a business is a major decision that often has the potential to leave entrepreneurs with significant financial freedom. In fact, in many cases, entrepreneurs start a business with the intention of selling it once they reach a certain valuation point. One only has to look at the recent sales of Instagram to Facebook ($1 billion) or Beats Audio to Apple ($3 billion) to see why selling a business can be an attractive proposition to many entrepreneurs. Of course, these billion-dollar examples represent a fraction of the kinds of mergers & acquisitions that regularly occur in the business marketplace. That being said, a deal worth a fraction of these sums could still put a hefty sum of life-changing money into an entrepreneur’s pocket.Fotolia_74847478_Subscription_Yearly_M-300x180

As a result, it is important for people who are considering selling their business to do so with the guidance of legal counsel that understands the legal issues that often arise in selling an existing venture. Below are four tips for entrepreneurs who are thinking of putting their business on the market.

  • Determine your goals – Of course, everyone who puts a business on the market is ultimately looking to make money. Some people, however, have a set amount that they feel that they need to obtain in order to make a sale worth it. For others, it is extremely important to stay involved with their “baby” after a sale has been made.
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