Whether you have built up your business and now are looking for an exit, or you are looking to acquire a new business, or you want to capture the economic benefits of merging two or more businesses, an M&A strategy in California, New York or Delaware can be important to fulfill a number of business goals. The size of your business or company generally will not be a factor in the determination of whether a purchase and sale transaction or a merger will benefit you. On the other hand, mistakes during a merger or acquisition are very easy to make if not guided by experienced corporate counsel, and can lead to costly delays, conflict, and litigation.
I provide legal assistance in Los Angeles and Ventura County, CA, New York City, and elsewhere to buyers and sellers of businesses and to boards of directors and management teams, partners, and shareholders contemplating a merger. Whether you want to are planning an acquisition or sale of a company, I will guide you through the steps and proactively address legal and related financial and other business issues.
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What Are Mergers and Acquisitions of Small Businesses?
Mergers and acquisitions ("M&A's") is an umbrella term used to describe business transactions involving either (1) two or more businesses merging or consolidating; or (2) one business or investment group acquiring an existing business.
- A merger is a transaction in which one company (the "merging company") merges into another company (the "surviving company"). After the merger closes, the surviving company is the sole remaining entity and the merging company ceases to exist. The surviving company absorbs ("succeeds to") the assets and liabilities of the other entity, and the merging company comes to an end. A merger may help the participating businesses reduce costs while growing market share for greater efficiency, productivity, and profit. This process is intended to be mutually beneficial for the owners of each of the participating companies. The surviving company may choose a new company name that better reflects the mission of the joined businesses, or may keep the name of one of the constituent companies to benefit from exsiting brand awareness.
- Under a consolidation, two or more companies come together to create a brand-new entity that takes on the assets, liabilities, and financial resources of the constituent businesses. Businesses often consolidate to increase profitability and take advantage of cooperation, rather than competition.
- An acquisition occurs when one business buys part or all of the stock or assets of a second business. The company acquiring the stock or assets of the seller company usually keep its own legal structure, while adding the acquired business to its operations. If the seller business has significant brand awareness, important trademarks, or an established website or other similar assets, the buyer company may continue to use the seller company name to capitalize on consumer goodwill.
While often discussed in the context of large, publicly-traded conglomerates or multinational corporations, M&A's can involve businesses of any size, including small businesses.
Before entering into an M&A transaction, it's essential to draft a detailed primary agreement (a merger agreement, stock purchase agreement, or asset purchase agreement). These transactions also typically include a number of ancillary agreements that are necessary either to document related transactions or to effectuate, memorialize, or provide evidence of the primary transaction and related matters, or otherwise to support the overall deal.
Such ancillary agreements typically include (depending on the specifics of the deal) one or more of the following: disclosure schedules; shareholder consent; board consent; promissory note (and, if the note is secured and/or guaranteed, a related pledge or security agreement and guaranty agreement); escrow agreement; bill of sale; assignment & assumption agreement; trademark or other intellectual property assignment agreement; one or more employment agreements; one or more consulting agreements; non-compete agreement; non-solicitation agreement (aka, no-hire agreement); transition services agreement; voting agreement; lease agreement; supply agreement; and distribution agreement. This is not an exhaustive list, and the final set of deal documents will depend on the nature and terms of each deal.
In addition, M&A transactions often require notices and consents to be given to and obtained from various parties, such as taxation authorities and other governmental entities, landlords, and third parties to business contracts to which the seller is party,
The main agreement (merger agreement or purchase agreement) covers important information about the transaction, such as:
- The seller's business details, financial condition, litigation, tax matters, employment matters, intellectual property, regulatory matters, and other matters related to the seller and its business and assets.
- What specific assets or stock are being purchased from and retained by the seller
- In an asset purchase, an allocation of the purchase price to and among the various asset classes for tax purposes
- The level of access each party will have to the other's financial information for due diligence
- Any other terms of the agreement
Should Your Small Business in California, New York or Delaware Consider an M&A Deal?
There are several reasons why an M&A transaction may be relevant to your small business. A merger or acquisition could allow you to:
- Expand Market Share – Merging with or acquiring companies with an existing market share or complementary business can give you access to better growth opportunities, including different geographic markets. By sharing expertise and experience, you can expand your business immediately rather than building a new business from scratch.
- Increase Profitability – Combining two or more smaller businesses may allow you to lower labor costs and take advantage of economies of scale to grow your profits. When companies merge, they can eliminate extraneous staff to reduce labor costs while purchasing raw materials and/or supplies at higher volumes to reduce overall costs. These savings can be passed on to consumers.
- Update Products, Services, or Business Model – If your business is unable to keep up with technological advancements, another business may be interested in acquiring it. This avoids your business from sustaining continued losses. Or you may consider an M&A with another business to access new technologies.
- Corporate Restructuring – If you are considering restructuring debts and equity to reduce loan costs, an M&A deal may help you to do so.
- Increase Financial Resources – When companies merge, they pool financial resources. This increase in financial leverage may open the door to new investment opportunities.
Entering into an M&A transaction is a significant decision to make in the life of a business, so it's important to carefully reflect on your reasons for doing so.
Five Things to Consider Before a Merger or Acquisition in California, New York or Delaware
In addition to being clear on your goals, there is a range of considerations to turn your mind to before entering into an M&A agreement. Listed below are a few of these considerations.
- Business Valuation. If you're considering merging with or acquiring another business, you should first find out how much it's worth. A formal business appraisal will help you assess whether it's worth proceeding.
- Good Standing. Before entering into an M&A agreement, you should confirm the parties are in good standing—they are valid and certifiable—in the state where they were formed. If they are not, it may indicate financial issues and lead to problems when filing the necessary M&A paperwork.
- Company Culture. When two firms combine or one is acquired by another, there can be a significant disconnect between the cultures. It's important to spend time strategizing how to merge different company cultures to ensure a smooth transition.
- Intellectual Property. If you're acquiring a company, you should check its intellectual property assets and whether they are protected by trademarks, copyrights, or patents. Also confirm whether the business you are acquiring has any outstanding intellectual property against it, as these can take a lot of time and resources to resolve.
- Anti-Money Laundering. If the business you're merging with or acquiring does any business in foreign countries, you must consider anti-money laundering laws and regulations. This includes confirming whether the other business engages with banned individuals or companies.
Even for small businesses, M&As can be complex, lengthy, and potentially risky business transactions requiring a large amount of due diligence. For these reasons, it's worth seeking professional financial and legal advice before entering into an M&A deal.
Mergers and acquisitions can be a strategy for growth, but to do it right, you must plan and consider all the legal implications. I provide comprehensive corporate and securities law representation and related business services. If a merger or acquisition is in your future, I will guide you through the process and act proactively to protect your interests. Click here to make an appointment now for a free consultation, or call me at 310-567-5966 (California), 212-414-5966 (NYC) or 888-774-1474 (Toll Free) to schedule a free initial consultation. I am here to provide experience business law counsel to clients buying, selling, merging, and consolidating business interests.
This article is not legal advice, but is provided for general information purposes only: see the disclaimer in the footer of this site, and read Legal Notices here.