Structuring and negotiating an acquisition is always a challenge. Working with a corporate lawyer with experience in your industry who has completed similar transactions is crucial to ensuring a positive outcome. Priori Legal allows you to search for the right legal partner using detailed criteria to bring the best candidates to you. Once you have found the right attorney to support your deal, it is important to discuss the following considerations.
Deal structure must be decided early in any potential merger or acquisition transaction. Plainly stated, you must decide how much of the company you are interested in purchasing and how you want to effect that purchase. For example, if you’re only interested in a company for a single asset, it may sense to investigate purchasing that single asset rather than purchasing a controlling position in -- or all stock of -- the company. In other cases, you might need to own the full company in order to achieve your goal. Other consideration, including liabilities, third-party consents, taxes and regulatory compliance issues, may also factor heavily in your deal structure decision. In any case, the structure of a deal can greatly impact the overall value of your acquisition, so it is important to take time to discuss deal structure with your M&A lawyer early on in the process.
You can download a free template of a Business Acquisition Term Sheet from Priori's Document & Form Learning Center.
The total topline amount to be paid is not the only payment issue that arises in M&A -- seller and buyer must also agree on the form of consideration. The following factors are often considered in structuring the form of consideration for an M&A transaction:
Cash vs. Equity
When financing a deal, deciding on the form of payment can be a decisive factor as to whether or not a company is worth acquiring. In a cash deal, the seller recognizes an immediate cash gain upon the closing of the deal. In an equity deal, the seller receives stock of the purchaser or one of its affiliates -- often with not insignificant restrictions regarding when the seller can liquidate such stock. Whether an equity deal is attractive to the seller depends on seller’s view of the buyer’s business, as well as how urgently seller needs to recognize a cash payout from the transaction.
Working Capital Adjustments
Buyers need to make sure that the purchased company has enough capital on hand to fulfill the requirements of day-to-day business immediately post-closing, including obligations to customers and trade creditors. Sellers want to be sure the transaction takes the company’s full value into account -- including receivables and inventory on-hand. In order to balance these considerations, many M&A transactions include a working capital estimate at closing, followed by a working capital adjustment sometime after the closing. Such an adjustment allows buyer to take possession of a working business and then pay seller for working capital acquired in excess of the estimate amount. When you are considering purchasing a company, you need to include such considerations early on. During due diligence, it is important to scrutinize both whether or not the working capital needs are at levels you are comfortable with and that any deal will include such working capital remain available.
In many transactions, the seller is required to keep a portion of the proceeds in “escrow” for 12-18 months. Such escrowed funds are kept in special bank account, overseen by an escrow agent, with pre-negotiated rules about when and how the money can be withdrawn. This can provide protection against breaches of the representations, warranties and covenants in a contract. Accordingly, in order to make decisions about whether to require an escrow account or what percentage of the purchase price should go in that account, you must consider how much risk you are willing to take on a possible seller default under the contract.
Human capital is an important part of what makes many companies successful. Before you should consider purchasing a company, you must consider the employees of the company and the extent to which they are assets you need to acquire in order to realize the value of your investment. If so, a lawyer can help you structure the transaction in order to ensure that you keep the human capital you need in place after the acquisition is final. To this end, strategies include contracting directly with key team members to ensure they remain with the acquired company, maintaining or increasing corporate benefits, offering incentive compensation and enforcing non-solicitation and non-competition agreements.
Depending on the deal, pricing can vary widely. When you hire a lawyer in the Priori network, hourly rates for this type of transaction can typically start at $225 per hour but range significantly higher based on certain types of experience. In order to get a better sense of cost for your particular situation, put in a request to schedule a complimentary consultation and receive a free price quote from one of our lawyers.
How do I know what a fair valuation for a business is?
There are many ways to determine the fair market value of a business, which can make agreeing on a fair valuation challenging. You must look at not just the absolute book value, but also capitalization of earnings, forecasted earnings of a company, and many other factors. Usually, getting a third party, such as a professional appraiser or an attorney, to do an assessment makes negotiating a fair valuation much simpler.
How do I decide if purchasing a company is ultimately in my best interests?
It’s impossible to give a simple formula that will determine if purchasing a company is ultimately a good decision or not, but by addressing all these issues and discussing the particulars with your team and outside counsel, you will be able to make an educated decision. The key is making sure to address all the considerations here, do thorough due diligence, and get objective advice from trusted M&A professionals.