Lawyer Letter to Client Acquisition of Stock Advice Again Aquisition of Stock Orate Problems
Mergers & Acquisitions: Your Questions Answered – Part 1
I am pleased to offering this two-role weblog serial on the most frequently asked questions I take received over the last 25-years equally a transactional lawyer helping scores of clients' close merger and acquisition deals. The questions I address are oft asked past clients considering the sale or conquering of a business.
Q. When should I engage an attorney in the deal process, and what volition they do for me?
Response: Most clients want to engage an attorney once they have a deal – pregnant they've typically signed a Letter of Intent (LOI) with the other party. In that location are a couple of situations where y'all should engage an chaser early in the process for tasks that will accept only a handful of hours, cost very little, but potentially save you thousands of dollars.
First, y'all'll want an attorney to review your engagement letter with your broker or investment banker. Many agreements will contain a "tail provision" if you do a bargain with a prospect afterward the engagement ends, where y'all would nevertheless have to pay the broker. You'll want this period to be as curt as possible and as well carve out any parties you lot've already begun talks with.
You'll too want an attorney to review your LOI before yous sign information technology. A primal issue will be the structure of the deal – whether it is a stock sale or an asset sale – but there can be other bug to address besides. For instance, I recently reviewed an LOI that was fully binding on my client, the seller, and tied him up so he couldn't talk to other parties for months. While the LOI was fully binding on the seller, it wasn't binding on the buyer at all, meaning the buyer was free to change whatever or all deal terms. Having a LOI be bounden on one party merely takes away their negotiating leverage.
Q. What should accept care of in my business before I start the sale process?
Response: Recall virtually your contracts and consider which may require the other party'south consent to sell your business. Most leases do as well as bank debt. Review your ownership and organizational documents for completeness as well as things such as preemptive rights and rights of outset refusal that may need to be waived by other owners. Certificate or at to the lowest degree understand whatsoever "handshake deals" your company is a party to. Finally, now is the fourth dimension to consider any estate planning opportunities – most times, once you lot've signed an LOI, any transfers for estate planning purposes will need to be a substantially equivalent value.
Q. What is the differences between a stock sale and an asset sale, and why should I care?
Response: A stock sale is where the seller sells stock or LLC interests in the company – the owner of the business, and non the business, is the seller, the business organisation stays the same, and the owner changes. An asset sale is where the visitor sells the assets of the business – the business organisation entity is the seller, it remains in place after the sale, with a new entity (the buyer) owning all of its assets. In that location'due south a change in the business organization, that will at present be run past a new entity.
A stock deal is subject to one level of tax for the seller, typically at the capital gains rate. An asset deal is subject area to two levels of tax: First at the corporate level on the gain/loss realized from the sale of the assets, and second, on the shareholder when the proceeds are distributed to him or her. An exception to this is if the seller is an LLC or an S Corporation – and then an nugget auction may be subject to merely ane level of tax.
Generally, sellers will prefer stock deals. At that place is only one level of taxation, at lower capital gains rates, so the seller nets more money subsequently taxes. These transactions are too simpler to reach considering the business stays the same – only the stock changes hands. Conversely, buyers generally like asset purchases. A major revenue enhancement advantage is that the heir-apparent can "pace up" the basis of many avails over their current taxation values and obtain ordinary tax deductions for depreciation and/or amortization. Asset sales are more complicated though – every asset and liability is transferred over – and can be disruptive for employees, vendors and customers.
So, there'southward a tension between buyers and sellers which is best dealt with early on in their discussions and fully documented within the LOI to avoid surprises later on.
Q. What are the fundamental issues parties need to consider in negotiating earn outs?
Response: An earn-out is typically structured equally one or more contingent payments of purchase cost subsequently the endmost which are payable when certain specified targets (such every bit minimum earnings earlier the deduction of interest, taxes, depreciation and acquittal (EBITDA), or a minimum number of new customers have been accomplished. When negotiating earn-outs it is important to:
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- Agree on A Target – Sellers prefer top line, such every bit revenues, while buyers prefer measures that take profitability into account. EBITDA is unremarkably used as a heart footing, perhaps with some adjustments
- Agree on Fourth dimension Frame – Earn out payments typically occur over 1-3 years. If there are multiple payments over multiple years, the parties volition decide what happens if the company fails to accomplish the earn-out target in ane period but makes upward for information technology in the following flow, or vice versa.
- Hold on Payment Amount – This could be a apartment corporeality, per centum of the target, or a multiple of the amount by which the company exceeds the earnout. Buyers typically want to see a cap, while the seller volition desire a minimum corporeality.
- How Will the Company be Run? Will the visitor accept sufficient resources at its disposal to attain the earn out target? Do new sales personnel need to exist hired, or sure people retrained?
- Sale Earlier Earn Out – What happens if the heir-apparent wants to sell the company before the earn out flow has ended? Seller volition desire an acceleration clause, that the total earnout would be paid upon a auction.
This article has addressed why it'southward important to work with an chaser as early in a deal as possible. We have also identified steps sellers should address before they move forrard with a sale. Finally, we discussed the difference between stock and asset sales and which type of auction buyers and sellers prefer. Finally, nosotros reviewed key issues to consider when negotiating earn outs.
In Function 2, we will await at the myths and misinformation floating effectually about the deal process. You volition acquire more about what rep and warranty insurance is and how information technology works in a merger or acquisition, and how purchase cost adjustments work and what to look for.
Source: https://www.avisenlegal.com/mergers-acquisitions-your-questions-answered-part-1/