Mergers and Acquisitions: What Business Owners Need to Know Before Taking the Leap
Mergers and acquisitions (commonly referred to as just M&A) is an umbrella term for various business transactions in which ownership of companies, other business organizations, or operating units are transferred to or consolidated with another company or organization. Mergers and acquisitions are actually two separate things, and the phrase actually encompasses corporate sales, purchases, and consolidations as well.
Many people dismiss the need to understand mergers and acquisitions as only applying to the largest companies, but the truth is that mergers and acquisitions can be a vital component of business for many small- or medium-sized companies as well. People should make sure they understand all of the terminology as it relates to this area.
Mergers
The general idea of a merger agreement is for the owners of two or more businesses to agree to combine their companies in an effort to expand their reach, gain market share from competitors, and reduce the cost of operations. Larger companies will need to seek approval from their boards of directors and shareholders.
Most companies that agree to merge will be similar in size and earnings to create what is known as a merger of the equals. Following a merger, the two individual companies will cease to exist and the new company will be born.
A horizontal merger involves merging two competing companies to increase their market share. The companies may offer the same types of services in the same area, and the merger could combine the customer base of both companies to increase cost-savings and pool resources.
Vertical mergers combine companies operating in the same type of business at different stages of the supply chain. These mergers allow for more predictable supply and demand as well as price stability.
A concentric merger or congeneric merger will combine businesses in a related industry that do not have a connected relationship. The intention will once again be to broaden a market base and increase marketing power.
Mergers could also involve purchase mergers where a company buys another company. Consolidation mergers result in new companies being formed by combining other companies.
Acquisitions
Acquisitions are technically purchases in which a more profitable company buys most or all of a company’s shares to gain control of the company. Acquisitions are simpler to understand because only the purchased part of a business is affected by a deal.
Acquisitions may be an asset purchase or a stock purchase. Asset purchases involve buyers purchasing the assets of another company and leaving a seller with their original cash and long-term debt obligations, but a stock purchase involves a buyer purchasing a selling company’s stock and taking over all aspects of a business, including its assets and liabilities.
Due Diligence in Mergers and Acquisitions
Due diligence involves buyers and investors appraising businesses and their practices to ensure they are making sound investments, and a person will want to have a Los Angeles mergers and acquisitions lawyer who can review the structure, operations, liabilities, assets, and key business relationships as well as the risks and possibilities of an investment or transaction to determine if a deal is being properly priced. Due diligence will involve taking a number of steps.
When it comes to corporate structure and general matters, your attorney can review various kinds of organizational documents, capitalization, corporate structure, and general corporate records to ensure everything is in proper order. Common kinds of documents a lawyer will look at include corporate bylaws, lists of securities holders, incorporation documents, organizational charts, stock option agreements and plans, warranties, stockholder and voting agreements, recapitalization or restructuring documents, stock appreciation rights plans and related grants, restructuring documents, recapitalization documents, business and sales agreements, and minutes from all executive committee, board, and shareholder meetings.
Due diligence for past income tax liabilities and tax carry forwards can include a review of IRS Form 5500 for 401(k) plans, government audits, tax sharing and transfer pricing agreements, credit carryforwards, net operating losses, notices or correspondence from any federal, state, local, or foreign tax authority, and all tax returns filed in the last five years. You will also want a lawyer to review intellectual property such as domain names, copyrights, patents, trade secrets, trademarks, IP litigation and claims, licenses, licensing agreements, and liens on intellectual property.
There will also be a need to examine material assets like equipment, real estate, technology, and inventory. A buyer will also want to know if they will be bound by equipment leases, supplier contracts, customer contracts, guaranties, credit agreements, and loans, schedules of accounts receivable and payable, joint venture or partnership agreements, settlement agreements, franchising agreements, license agreements, employment contracts, exclusivity and non-compete agreements, or sales agency, dealer, advertising, and distribution agreements.
Contact Our Los Angeles Small Business Attorney
Are you feeling confused about how to handle discussions about a merger or acquisition? Make sure you reach out to Steinberg Law to get the best possible legal support in your case.
Our firm understands how daunting these kinds of issues can be for all kinds of business owners, and we help our clients navigate these issues to achieve their desired results. Call (818) 855-1103 or contact our Los Angeles small business attorney online to set up an initial consultation.
