Articles Tagged with mergers and aquisitions

An earnout is a type of pricing structure used in mergers and acquisitions that makes some of the purchase price contingent on the performance of the business after the acquisition has taken place. In this sense, the sellers must “earn” this part of the sale price. At its most basic, these provisions serve to reallocate post-sale risk to both the buyer and the seller.  When considering a merger or acquisition, it is often best to get counsel from an experienced Silicon Valley merger & acquisition attorney to fully understand the terms and conditions of the agreement.

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When Are Earnouts Employed?

Earnouts can be employed in a variety of situations to resolve points of contention in the negotiations of a merger or an acquisition. Commonly, they are used when the seller is more optimistic about the future value of the company than the buyer. The earnout clause will allow both parties to reach an agreement that they believe to be fair. They can also be used as a financing mechanism and for the sale of startups with little operational and financial history.

In a corporate merger or acquisition, it is important to ensure that both companies involved are on the same page early in the process. Mergers and acquisitions can be complicated and can require costly resources, so it is important to know what each party is prepared to offer before moving forward with the transaction. One way to ensure both parties are on the same page is to draft a letter of intent (LOI), which outlines the deal points of the merger or acquisition and serves as a type of “agreement to agree”.

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The LOI should be carefully drafted by the purchasing company and submitted to the selling company and should set out important basic terms of the transaction. This letter is typically not viewed as a binding contract though that does not mean it should not be given careful consideration. When submitting an LOI, the buyer should put forth attractive though realistic terms. If it fails to do so, it could result in a breakdown in negotiations or a later legal dispute if the expectations set out in the LOI were not in good faith. On the other hand, the purchaser should fully realize that an LOI does not represent the final agreement and that the terms of the deal may change after due diligence is conducted. Because of the importance of an LOI to a merger and acquisition, you should always seek assistance from an experienced M&A attorney when drafting, reviewing, or negotiating the letter.

Provisions to Include in a Letter of Intent

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:

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.

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.

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