Articles Posted in Mergers & Acquisitions

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In a corporate merger or acquisition, it is important to ensure that both companies involved are on the same page early in the process. Mergers and acquisitions can be complicated and can require costly resources, so it is important to know what each party is prepared to offer before moving forward with the transaction. One way to ensure both parties are on the same page is to draft a letter of intent (LOI), which outlines the deal points of the merger or acquisition and serves as a type of “agreement to agree”.

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The LOI should be carefully drafted by the purchasing company and submitted to the selling company and should set out important basic terms of the transaction. This letter is typically not viewed as a binding contract though that does not mean it should not be given careful consideration. When submitting an LOI, the buyer should put forth attractive though realistic terms. If it fails to do so, it could result in a breakdown in negotiations or a later legal dispute if the expectations set out in the LOI were not in good faith. On the other hand, the purchaser should fully realize that an LOI does not represent the final agreement and that the terms of the deal may change after due diligence is conducted. Because of the importance of an LOI to a merger and acquisition, you should always seek assistance from an experienced M&A attorney when drafting, reviewing, or negotiating the letter.

Provisions to Include in a Letter of Intent

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Contracts are utilized in every type of business and every business owner should know that written contracts should be carefully drafted, reviewed, and negotiated before signing. However, not every business deal is memorialized in writing and many agreements are based on verbal interactions and a handshake. Just as with written contracts, legal disputes can arise over deals that were verbally made. When a disagreement arises, the first question is naturally: is an oral contract enforceable under the law?

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Whether an oral contract is enforceable depends on several factors. The law requires that certain types of contracts be in writing in order to enforce the terms of the contract. Some contracts that may apply to businesses that must be in writing involve the following:

  • Contracts for the purchase or sale of goods that are worth more than $500;
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An important step in the business acquisition process is determining the true value of the business to ensure you are paying an appropriate price. Valuation of a business can be complicated and can depend on the type of company in question, your goals, and many other factors. While this process may seem daunting, an experienced business lawyer can help to identify steps to take and help you decide whether a price is right. The following are some of the issues to consider when evaluating the price of an acquisition.

Examine the Current State of the Business

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There are many aspects of a business that should be closely examined before an offer is made, including, but not limited to:

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While many well-known businesses are either corporations or limited liability companies, partnerships remain a common and savvy business entity selection. In fact, some of the biggest names in tech—Apple, Microsoft, and Google—started out as partnerships.

What is a Partnership?

cooperation
Partnerships exist whenever there is a cooperative endeavor of two or more people, entities, or some combination thereof, to provide a product or service. The main characteristic of any partnership is that the partners share in the profits and losses of the business.

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Many business owners do not hire an experienced attorney for several reasons. Some believe they cannot afford it and others may believe there is no need for a lawyer unless a legal conflict arises. However, it is much more resource-effective (time, energy, and money) to have the guidance of a skilled business lawyer from the very start. Doing so can avoid costly litigation in the first place and will allow you to focus on your business operations and not on a legal case. The following are only some examples of how hiring a business attorney can help to avoid litigation.

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Business contracts – Businesses involve many different kinds of contracts, whether they are with fellow owners, suppliers, clients, or any other party. You may not recognize that a particular contract has unfair or adverse provisions that may leave your business vulnerable to losses or liability. Every single contract you consider signing should be carefully drafted, reviewed, and negotiated by a knowledgeable lawyer to protect your interests and avoid legal liability.

Compliance with business laws – California has a great number of laws that are relevant to businesses, and compliance is essential to avoid costly fines or legal conflicts. Such laws can regulate business formation, licenses, permits, zoning, taxes, employees, and many other issues. As a business owner, it may be challenging for you to identify all relevant laws and to ensure that you comply with them. An experienced attorney will know what steps you need to take to comply with necessary laws.

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Startups centered around a technological development or product are highly popular in this day and age—and for good reason. Companies such as Apple or Facebook originated in garages or dorm rooms and are now each valued at hundreds of billions of dollars. Even if you are not a technical person and know nothing about programming or coding, you can still start a successful tech startup, as evidenced by companies such as Pandora. It is not surprising that individuals are continually trying to bring the next big idea to life and start their own tech company.

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However, like any other type of business, there are many legal concerns for tech startups. One highly important concern is how to properly protect your intellectual property (IP). A novel and viable idea is generally the heart of a tech startup and you do not want to risk your success by failing to adequately protect your idea. The following are only some IP concerns that may be relevant to your tech startup.

Choosing the right type of IP protection

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Too many startups fail to successfully get off the ground because of decisions that result in inadequate financing. As a founder of a startup, you can have a completely viable idea and still fail due to financing mistakes. For this reason, it is important to understand the different types of financing appropriate at different stages of your business. Financing can be complicated and it is always helpful to consult with a skilled business attorney who can evaluate your financing needs and provide valuable advice.

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One type of financing used by startups is called “mezzanine financing.” The name is appropriate because this type of financing is in the middle between equity and traditional bank debt. Your business is less leveraged because there is no hard collateral to mezzanine investors, though many charge more interest than a bank loan. On the other hand, you will give up less control of your company than you will if you pursue additional equity funding.

When is mezzanine financing appropriate?

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Many startups in the tech sector are idea-rich and cash-poor, meaning that their most valuable (and often only) asset is their intellectual property that may have the potential to be worth a substantial amount of money. While some startups are able to move their ideas from concept to deployment with relatively little labor involved, many of these ideas require the assistance of developers, programmers, engineers, and marketers, all of whom are skilled professionals who can easily command salaries well into the hundreds of thousands of dollars per year.

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For this reason, many startups are faced with the issue of how to pay their employees during the development and launch phase, before they are generating any revenue. Of course, one option is to borrow the money or to seek investors – a solution that has significant pros and cons which should be considered. Another very popular option is to offer employees equity shares in a company in lieu of cash compensation. In some cases, this may take the form of equity for a lower salary than they would normally expect, while in others an equity share may be the only compensation they receive.

There are many issues that tech entrepreneurs and founders should consider when offering equity as compensation. These include the following:

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A comprehensive evaluation of a target company is a critical component of any successful corporate acquisition. Often referred to as a “due diligence evaluation” or “due diligence review,” this process involves fully evaluating the company that is being acquired (the target) in terms of its assets, liabilities, litigation risks, intellectual property matters, as well as other issues that could have an impact on the feasibility and advisability of a particular acquisition.

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The most effective way to ensure that a thorough due diligence investigation is conducted is to retain legal counsel that is familiar with representing buyers in mergers & acquisitions. Some of the most important issues to address in a due diligence review of a potential corporate acquisition are discussed below.

  • The target company’s financial matters – Issues such as financial statements, liabilities, margins, future projections, and potential capital expenditures should all be fully evaluated. This is often the first aspect of due diligence.
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A corporate merger is a transaction in which two or more companies combine to form one entity. Due to the complexity of merger transactions, it is highly recommended that anyone contemplating entering into such a transaction retain legal counsel. Here are three examples of how an attorney can assist in a corporate merger.

An attorney will structure the way that a transaction occursFotolia_73155469_Subscription_Yearly_M-300x183

Mergers can occur in a variety of ways such as a reverse merger, horizontal merger or vertical merger with consideration being made with stock, cash, a combination of both and other variations. Each of these merger structures have various legal and tax implications that are often significant. For this reason, the advice of a skilled attorney is critical to structuring a merger transaction in the most beneficial way possible.

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