Mergers and Acquisitions
Although it seems like many attorneys like to say “I do mergers and acquisitions”, in reality, at its base, it is the assisting clients in the buying and selling of businesses. This can be accomplished in a multitude of ways, but, in the end, it is the buying and selling of businesses.
In transactions such as this, it is important that the buyer and seller each understand the needs of the other party. While the parties have separate interests, each of which need to be protected, it is the job of the attorney, whether representing the buyer or the seller, to understand each parties needs so that a transaction is completed.
From the seller's standpoint, the transaction is usually fairly simple: the seller wants to make sure that he/she obtains the purchase price and that the seller does not get brought into litigation following the close. If the purchase price is all cash, then that aspect is fairly simple. However, if the purchase price is a combination of cash and promissory note or other consideration (perhaps an earn out) the seller may require security so that the seller is assured (to the extent possible) of receiving that which he/she believes they are supposed to receive.
As for limiting liability (litigation) following the close, it is essential that the seller make full, complete and detailed disclosure of all aspects relating to the business. Although that is generally elicited by the buyer through the required representations and warranties, the seller needs to understand that, rather than being a burden, full disclosure is the way to limit liability.
From the buyer's standpoint, the transaction is more difficult in that the buyer needs to make sure that he/she acquires all components that go into making up the business, including name, goodwill, contracts, continuing business relationships, which, in the end, relate to the continuing operation and cash flow of the business.
The simplest transaction to structure is a stock purchase, however, it also exposes the buyer to the most liability. A stock purchase can be as simple as the shareholder/seller signing over his/her shares to the buyer and the buyer paying the consideration. However, the buyer then gets the entirety of the business, which includes the good, the bad and the ugly (meaning both known and unknown liability). As a result, most transactions are structured as an asset purchase whereby the buyer purchases those assets which the buyer desires (usually all or substantially all of the assets) and either assumes no liability or only those liabilities which the buyer chooses to assume.
However, the fundamental question in any transaction is which purchase is better for the parties. Generally, from the seller's standpoint, there may be tax benefits to selling stock, which is counterbalanced by the buyer's desire to purchase assets and avoid liabilities (including unknown liabilities). However, there are certain companies where the main assets include contracts (including licenses), which contracts are either not assignable or where assignment might be difficult and therefore a stock transaction may be the only way to proceed.
Rather than trying to answer any questions here, those are the topics that need to be considered: tax aspects of the transaction to the seller and to the buyer, assignability of contracts, the potential for liability, both known and unknown, etc. Once these items are discussed, it generally becomes clear as to which method is the best and how to then protect the interests of both parties.
For more information or to discuss your estate planning needs, please contact Ross Schwartz.