Before Acquiring A Business, Make Sure You Are Prepared And Protected
A business purchase or acquisition may be the most significant transaction of your life. Putting a deal together is a lot like a jigsaw puzzle: to get to the point where you sign on the dotted line numerous pieces all have to fit together just right. Without proper alignment, an otherwise successful transaction can go south in a hurry. The efforts you make prior to closing will have a proportional impact on the success of the transaction: hastily thrown-together acquisitions have a much greater chance of ultimate failure.
Performing Due Diligence
Obviously, you will want to know as much as possible about your target business. The time you have to spend in the due diligence period will be limited by the seller, so you need to make the most of it. Having a thorough checklist provides a map that will take you from ‘nearly ignorant’ to ‘pretty darn knowledgeable’ in a matter of weeks.
The specific due diligence considerations vary from one company to the next (diligence checklists can be as short as several pages, or as long as thirty or more), and an experienced business attorney who is familiar with your objectives and the target’s industry should always guide this process. However, you will need to generally review the legal documents governing the business, the financial statements and their preparation history, and the target company’s relationships with individuals and other businesses.
For example, before acquiring a business you should understand the relationships with its employees. What are the employees’ salaries? What benefits do these employees receive? How much time off have the employees accumulated? Do the most highly-valued employees have an incentive to stay following the acquisition, or are they likely to leave with a sale?
Employee relationships are just one consideration. The type of business, the structure of the transaction (stock purchase or asset purchase), the primary source of business income (through the sale of products or through services), and the simplicity or complexity of the deal terms are just a small sample of some of the considerations that will dictate the breadth and depth of the due diligence period.
A due diligence period conducted with wisdom and efficiency will provide assurance as to what you’re buying, and put you in a stronger position to re-negotiate key terms of your offer, if necessary.
Structuring the Transaction
There are principally two ways to structure a business acquisition: purchasing all or substantially all of the assets of the company or purchasing its stock.
The structure of the transaction has significant ramifications with regard to both tax and liability issues. These types of decisions on structuring your merger or acquisition can drastically alter the future of your business. While a seller generally desires a stock transaction, buyers will more commonly seek to acquire the assets of the business. The respective parties will have competing tax benefits and burdens, and potential liabilities will extend to the purchasers of privately held stock. In some instances, when government contracts make up a good portion of the target’s revenue, a stock sale is the only option. This decision must be made carefully and with consideration of all relevant factors, with the outcome often having an effect on the ultimate purchase price.
Selecting a Business Structure
Another important decision you will have to make when purchasing a business is how you want to structure the company formed to acquire the stock or assets of the target business. This can affect your taxes, potential liabilities, your ability to borrow money and the amount of paperwork required of you.
Choosing the appropriate business structure to meet your needs and goals requires clear understanding of your particular circumstances and knowledge of the law. This decision should not be made without the guidance of an experienced team of professionals, including an attorney and a CPA.
Preparing the Representations and Warranties
No single factor can determine the success of your future business, but the representations and warranties made by the existing company owner are among the most critical aspects of the acquisition. Even with all the due diligence in the world, the existing business owner is in a much better position to understand the business than you can be as an outsider.
Through representations in the contract, the business owner outlines the past and present facts of the business, providing assurances that the facts are true. Through warranties, the existing business owner makes promises regarding the future of the business.
These provisions essentially serve as a means of allocating the risks of the business and shifting liabilities in the event that the facts are not as represented. For example, if the current owner represents that the business has no pending legal claims and this turns out to be untrue, the buyer will have recourse as provided in the deal documents, in addition to the general recourse one might have under the general law of the state that governs the transaction.
To Build a Strong Business, Begin With Strong Legal Guidance
Acquiring an existing business offers both significant challenges and incredible opportunities. With hard work (and a bit of luck), you can take a struggling company and make it profitable or take a successful company and make it even stronger.
However, to build a strong company, it is important to have a strong foundation. Make sure that you are well prepared and have taken all of the steps necessary to protect your business and financial interests. Work with a knowledgeable business lawyer who can guide you through the acquisition process.