Articles Posted in Mergers & Acquisitions

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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.

An attorney will structure the way that a transaction occursFotolia_73155469_Subscription_Yearly_M-300x183

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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If your company is the target of a merger or acquisition, you are undoubtedly facing a process called due diligence. Due diligence is essentially a thorough investigation into the state of the target company so that the buyer can be aware of all potential liabilities and other issues prior to the completion of the transaction. Due diligence is necessary for several reasons, including that your company is accurately valuated, that there are no major impediments to closing the deal, and to ensure all relevant documentation is properly drafted.duediligence

If you have never been involved in the due diligence process as part of a major business transaction before, you may be easily overwhelmed by the complicated and time-consuming process. However, acting appropriately during this process can help to ensure the deal is as beneficial for your company as possible. Due diligence is crucial to corporate transactions, but if handled correctly, the process can be done efficiently. Here are some steps to take. Continue reading ›

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Selling your business can make a good profit when sold to the right buyer. When you decide to exit the company, selling your business may be a good strategy. A business sale may not be easy, but there can be many rewards and benefits. If you’re interested in selling your business for profit, there are 3 things to keep in mind to make sure the process goes smoothly and without a legal hitch.

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3 Tips for Selling Your Business

  1. Hire Counsel

You’ll need someone in your court with a background on financial and business transactions. An experienced business attorney can help you prepare necessary documents and close the sale. You’ll want to lay out all finances to see how they may impact your personal wealth. You also won’t want to let the stress of the sale process lead to missed deadlines or late filing of documents. There are a lot of planning, structural, legal, and financial issues involved with the sale of a business, so having an experienced business attorney will be critical to ensure you’re making the right decisions. Continue reading ›

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A merger or acquisition can be a great way to grow your business. Joining forces or purchasing another company increases your market share and potential profits. There’s no real way to know if the venture will pay off. However, the proper due diligence can provide reassurance that the move you’re making is a good one. Due diligence is a multi-step process, so in this post we’re going to focus on just one part: liabilities.

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Understanding Liabilities

Any merger or acquisition comes with a degree of risk. Liabilities are the debts and obligations incurred through the course of doing business. Loans are considered a liability as are accounts payable and accrued expenses. It’s important to take a look at the total number and dollar value of all liabilities. Also, look at the company’s payment history. Are bills paid on time? Is there a record of default? These are red flags that should give you pause. Remember, once you’ve assumed liabilities the responsibility is yours.

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A quick scan of the headlines shows come confusion about the deal between AT&T and DirecTV. Some media outlets are calling it an acquisition while others say the 48 billion dollar purchase is a merger. Mergers and acquisitions are similar with a few important distinctions. In this post we’ll address the key differences between these two kinds of transactions.

What is a Merger?

One component of mergers and acquisitions is relational. Mergers are seen as the more friendly way of doing business. When two firms merge, both shed their old companies to form a new one. A good example is the merger between Daimler-Benz and Chrysler. In this scenario, both companies ceased to exist. They issued new stock as Daimler-Chrysler. Mergers are a common occurrence between two companies of equal size and standing.

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One of my clients is a medium sized manufacturing plant here in San Jose. Although not a high-tech business, they have extensive capital assets and specialized skills. The business is being run by the second generation of family members, and the third generation is now being trained to take the reins someday. The family has recognized that many of their competitors are still being run by the first generation of owners, and it does not look like those businesses are likely to transition to other family members. As the owners of the competitive businesses age and want to retire, they will be looking to sell their manufacturing plants. My client wants to buy them. We recently sat down and discussed acquisition strategies. I explained that there are two common ways to buy a business – either you buy the stock, or you buy the assets. What most people do not realize, is that even when you are only buying the assets, you could be liable for up to three times the purchase price in state taxes that should have been paid by the seller.

Most people know that when you buy the stock of a corporation (or membership interests in an LLC), you get all of the assets as well as all of the liabilities in that company. As a result, many of my clients want to buy only the assets of a company as a strategy to avoid the liabilities (known and unknown) that come with a business with history behind it. To accomplish this, we draft an asset purchase agreement that includes lists of which assets we are buying, which liabilities we are buying, and which liabilities we are not taking on. For example, when you buy the stock of a company, you get all of its employees including their accrued and unpaid vacation time. When you buy the assets of a company, we ask the selling business to terminate all of its employees so that we can start over by hiring them in the acquiring company as new employees, without any potential claims for what came before. However, many people do not realize that certain tax liabilities may follow the business of the company rather than the company itself. So, if you buy enough of the assets to be considered as having purchased the company, you could be buying tax liabilities… even if they are on your list of items excluded from the sale.

Each of the Franchise Tax Board (state franchise and income taxes), the Board of Equalization (sales taxes) and the Employer Development Department (employment taxes) has the right to come after the buyer of a business for unpaid taxes in an amount up to the entire purchase price. So, if you pay $100,000 for the assets of a company, you could be liable for unpaid taxes of up to $100,000 to each of those three government entities. Your $100,000 purchase price just became $400,000!

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As a business and M&A lawyer in San Jose, it is not uncommon for me to burn the midnight oil hammering out a deal for a Silicon Valley client. There is often a need to break from the perpetually connected life to recharge the lithium cells, so to speak. On a recent bike ride in Santa Clara on the local single track, it occurred to me that the life of a deal can be contained in a single mountain bike ride.

A ride starts with the first drop of a pedal. Any deal starts with the first realization that two people or groups can get together and construct a process that will create value for both of them. Whether it is a simple software license, or a complex strategic alliance and funding deal, it is that first pedal that moves everything forward.

Whether you are involved in a transaction deal or a single track mountain bike ride, you need the right tools to make it all work. For a lawyer, it is the years of learning that just begin after you leave law school. The late nights wrestling with creating a structure that will reduce risks and the time spent attending or teaching professional seminars all contribute to the base of knowledge that comes to bear in every transaction. Making sure your tires fit the trail and your derailleur is adjusted and chain oiled can make the difference between a ride and an ordeal.

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