Consolidating businesses through legal contracts can stimulate industries and strategically grow companies. Mergers and acquisitions are as much of a financial affair as they are a legal process. Mergers and acquisition law can be difficult to understand by yourself, which is why you will need to work with advisors if you want to sell a business. Here are a few important things to know about M&A law to prepare you for the process.
Six Things to Know About Mergers and Acquisition Law
1. M&A Deals May Take a Long Time
Mergers and acquisitions can take several months or even years to finalize, depending on the sophistication of the deal. From the time business owners decide to sell a business to the closing of the contract, the average deal will take four to six months. Sometimes, this timeframe is determined by the overall urgency of the consolidation transaction, such as if the buyer speeds through due diligence to complete the deal.
How to Speed Up the M&A Timeline
A seller can shorten the timeline of an M&A deal by contacting legal advisors, financial advisors, investment bankers, and other experts with key experience in selling businesses. With the help of advisors, sellers can make key preparations to speed up the deal once interested buyers submit bids, such as disclosure schedules, financial statements, and other materials.
One crucial element for sellers to pay attention to is cleaning up business systems and customer databases. It’s a good idea to make a business as attractive and streamlined as possible since most buyers will want to invest in a business with clean systems. This is the main reason why sellers may want to start preparing for selling a business several months in advance.
2. M&A Offers and Valuation Are Negotiable
The overall valuation of a company is negotiable. Like all other elements of an M&A deal, the selling price and value of a business can be negotiated based on the types of assets that are included in the deal. Assets may include patents, licenses, or technology owned by a company, as well as whether the business has long-term contracts or customers. Sometimes, assets can even include the employees, such as the management team.
Many buyers will place a lot of importance on projections in determining the value of a business. They may also use market comparables that assess how quickly a business is growing compared to others in the same industry. Historical trends for financial performance and projected financial growth are crucial points that many buyers pay attention to, since these factors may illustrate how successful a company will be in the future.
3. M&A Buyers Carry Out Due Diligence
Due diligence is a process that is performed by any interested buyers. The purpose of due diligence is to look for any financial or legal liabilities or contingencies that may affect the M&A deal. Due diligence will flag any potential risks, so it’s important to conduct a thorough investigation before a contract is offered to avoid liabilities and legal issues.
Due diligence will examine all aspects of the company being acquired, from intellectual property to historical financial information. Some of the most common elements examined during due diligence include financial statements, customer and sales data, material contracts, employees, management, and previous litigation against the seller or company.
4. M&A Legal Advisors Help With Contract Negotiation
During an M&A deal, it’s the role of legal advisors to prepare the contract that will be negotiated. The contract for this deal will identify the risks for both the seller and buyer from information gained during the due diligence process. Contracts for M&A deals can take many forms, including asset purchase agreements or stock purchase agreements.
An asset purchase agreement is a basic contract wherein a seller transfers some or all assets of a business to a buyer. The terms and conditions of an asset purchase agreement will include the purchase price for individual assets and payment arrangements. A stock purchase agreement is a similar arrangement, except equity is sold instead of business assets.
Legal Experts Help With Deal Structure
Legal experts in mergers and acquisition law play a vital role in structuring the deal for an acquisition. Specifically, lawyers will address issues related to the deal structure, such as obtaining shareholder approval for selling assets or stocks. Lawyers will also advise about tax consequences, liability transferability, foreign regulatory mandates, and other requirements for the contract.
5. M&A Deals Are Finalized With Closing Agreements
Closing is the crucial point for finalizing any M&A deal. Aside from both parties signing the appropriate documents to facilitate the selling of assets or stocks, both parties will also need to perform certain tasks to finalize a merger or acquisition. These closing directions are determined during contract negotiation, and each M&A deal will have different closing requirements.
6. M&A Deals Have Post-Closing Obligations
After closing an acquisition transaction, both the buyer and the seller will still need to meet post-closing obligations. Compliance with these obligations is a typical part of most deals, but the size of the company or the specific stocks being sold may influence the level of sophistication these obligations will have.
Post-closing obligations are traditionally designed to bolster the future success of a newly acquired business. These obligations are often legal practicalities that will ensure the newly acquired business has ample time to grow and may even protect intellectual property. The restrictions for post-closing obligations will be outlined in the contract signed by both parties.
Non-Compete and Non-Solicitation
Some important elements of mergers and acquisition law are non-compete and non-solicitation clauses, which can be included in post-closing obligations. A non-compete clause prevents sellers from creating products or services similar to the ones that have just been sold, which will prevent competition for similar products in the same market.
A non-solicitation clause is a little more complex. This clause prevents sellers from soliciting employees, former partners, or associates after a business has been sold. Usually, a non-solicitation clause will be active for at least one to two years before it expires. This clause may be used to protect intellectual property and other proprietary information.
Mergers and acquisition law is often complex, but these contractual agreements are crucial for helping businesses grow and expand. A legal advisor is an essential resource for sellers and buyers, particularly when it comes to closing agreements, post-closing obligations, and due diligence. To learn more about how advisors can help with your M&A deal, reach out to ASA Ventures Group today.