When acquiring a business, understanding the legal aspects is crucial. Here are 5 considerations to maximize value and minimize risks.
Deal Structure
A business acquisition can take three primary forms:
Asset Sale: The buyer selects specific assets, leaving unwanted liabilities. This method offers a "step-up basis" for asset depreciation but can be time-consuming and may incur high taxes.
Stock Sale: The buyer acquires the seller's shares. This approach is faster, avoiding the need to transfer each asset, but the buyer assumes all existing liabilities.
Merger: One corporation absorbs another, streamlining the process and often avoiding pitfalls of asset sales. Mergers can also bypass dissenting shareholders, making them attractive in certain cases.
Raising Debt for the Acquisition
Debt financing is a common method for acquisitions:
Senior Loans: "First in line" for repayment, covering up to half of the acquisition cost. Buyers often seek local banks or SBA loans, which can provide favorable terms and repayment schedules.
Seller Notes: Obligations to the seller, aligning their interest with post-sale success. These notes are subordinated to senior loans and may restrict increasing senior debt until fully paid.
Raising Equity
Buyers can form a special purpose vehicle (SPV) to raise equity. Key considerations include:
Economics: Negotiating investor returns and management salaries.
Minority Protections: Establishing rights like tag-along, drag-along, and first refusal to safeguard investors.
Call/Put Options: Allow the company to buy out investors or provide a cash-out option.
Bridging the Valuation Gap
If parties have differing views on the company's valuation, several mechanisms can help bridge the gap:
Seller Note: An adjustable note based on post-closing metrics like working capital.
Earn-Outs: Deferred payments tied to future performance, offering higher payments if targets are met.
Forgivable Note: Contingent on post-closing performance; part or all of the note is forgiven if targets aren’t achieved.
Rollover Equity: A portion of the seller's proceeds is rolled into equity in the post-closing company, providing an incentive for success.
Negotiating the Purchase Agreement
Negotiating the purchase agreement covers areas like:
Reps and Warranties: Buyers prefer broad representations; sellers prefer narrower ones to limit liability.
Escrow and Setoffs: Sale proceeds held in escrow, with terms governing size and conditions for release.
Net Working Capital: Adjusting the purchase price based on the company’s net working capital at closing.
Key Personnel Issues: Addressing non-compete agreements, confidentiality, and transition plans.
These considerations lay the foundation for a well-structured acquisition, protecting both parties and aligning the transaction with strategic goals. A clear understanding of these legal aspects is essential for a successful deal
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