Mergers and acquisitions (M&A’s) aren’t just for big corporations. Small businesses can, and frequently do, merge with or buy out competitors. If you’re contemplating an M&A transaction as a buyer or seller, here are a few tips to get the process started.
If you’re the Buyer, you should know:
- What contracts the Seller has and whether they will be terminated. A merger or acquisition agreement can provide that the Buyer will be the legal successor of the Seller, and will assume all the Seller’s legal obligations. However, it’s best to figure out what those obligations are early on. If the Seller has contractual obligations that the Buyer doesn’t want to continue, the Seller will need to pursue termination of those contracts.
- Who’s paying taxes. Most contracts transferring large assets allocate tax responsibility, including assessments against land, to the Seller. There’s not a hard rule, however, so it’s best to have a written agreement that tax payments remain the Seller’s responsibility until the purchase or merger is complete. This minimizes risk in the event the transaction becomes protracted or is never accomplished.
- That you can cancel company shares. For example, a merger agreement can provide that at the time the merger becomes effective, corporate shares simply cease to exist. They could be replaced by a proportionate share of stock in the new company, but there’s nothing requiring a buyer to do so.
- That buying out or merging with a competitor isn’t the only way to purchase its assets. An asset purchase agreement is a routine way for businesses to sell a portion of their assets—for instance, a product and associated trademarks—without needing to acquire the whole business.
If you’re the Seller, you should know:
- That selling your business without merging doesn’t mean you have to terminate its current form. A corporation acquired by another corporation, for example, could simply become a subsidiary of the buyer corporation.
- That if you do terminate your business in its current form, there’s probably a defined legal process for it. For example, specific rules govern the terminating or “winding up” of an LLC, including paying out shareholders. For a corporation, you might need to file a notice of dissolution with the Secretary of State that the corporation no longer exists. Many states’ Secretary of State websites have resources for dissolving various businesses.
- Whether the buyer expects you to sign a non-compete agreement. If a competitor is buying you out, it’s safe to assume they don’t want you establishing a new competing business in the near future. Non-compete provisions can even survive the termination of a contract like a merger agreement, so it pays to be attentive to where, how soon, and how much you can exercise your expertise after selling your business.
- Whether you’re indemnified against future lawsuits. An ideal acquisition or merger agreement would clearly state that you’re not obligated to help the Buyer defend any claim arising against the Buyer related to the Seller’s business after the acquisition or merger takes place, pay costs and attorneys’ fees, or pay any damages awards.
Lastly, both Buyers and Sellers can benefit from the advice of an experience attorney to help tailor a merger or acquisition agreement to a business’ individual needs. This article was sponsored by Vlodaver Law Offices, LLC, a business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.