Managing Attorney
Mergers and acquisitions are by no means limited to big companies and large multinational corporations. Smaller businesses may merge with or acquire one another as well, and they, too, need legal guidance throughout the process of doing so. With the right attorney by your side, you and your organization can approach your merger or acquisition with confidence. Find out how Capstone Legal Strategies can serve you each step of the way.
The Basics of Mergers and Acquisitions
Small businesses may decide to either merge or to have one acquire the other. Mergers and acquisitions are often abbreviated to M&A transactions, although there are important differences between the two:
Merger
When two businesses combine to form one legal entity, it is usually called a merger. Once the merger is complete, the independent existences of the two previously independent businesses cease. Mergers tend to take one of the following forms, depending on the relationship of the businesses:
- Horizontal: Two companies that are competitors in the same market, offering similar products and services, may merge horizontally.
- Vertical: This type of merger occurs when the companies are in the same industry but provide goods or services at different stages.
- Congeneric: A congeneric merger happens between two companies in the same industry that produce different products.
- Conglomeration: Finally, a conglomeration is the merging of different and sometimes unrelated businesses.
Acquisition
An acquisition happens when one company purchases another. There are two main ways that these relatively common business transactions occur:
- Stock purchase: This type of acquisition results from one company purchasing the other company’s stocks, effectively transferring ownership.
- Asset purchase: Alternatively, the buying company can purchase the assets of the other company, including its inventory, equipment, machinery, land, and intellectual property.
The Process
This is an overview of the steps to finalize most mergers and acquisitions:
- Nondisclosure agreement: A nondisclosure agreement (NDA) in an M&A transaction is a critical document that ensures sensitive information shared during negotiations remains confidential. It is often the first document that is signed between the parties. It protects both parties by preventing the misuse or unauthorized disclosure of financial data, intellectual property, trade secrets, and strategic plans. NDAs foster trust, safeguard competitive advantages, and reduce the risk of harm if the deal does not move forward, making them an essential first step in the due diligence process.
- Strategic development: The companies proposing to merge or acquire and be acquired will discuss their objectives in entering the transaction and the value they hope to attain from it. One company will request information from the other to make an initial determination of value.
- Letter of intent and negotiation: A letter of intent, which is usually not legally binding, formally begins the merger or acquisition by spelling out the basics of the proposed transaction and potential ramifications (including legal considerations). This opens the door to negotiations, which necessitate the next critical step.
- Due diligence: During due diligence, the companies examine each other’s books (e.g. their financial statements, assets and liabilities, cash flow, and more) to decide whether the initial valuation was correct or if it needs to be adjusted. It is especially critical for an acquiring company to conduct an appropriate amount of due diligence on the target company.
- Further negotiations and contract drafting: Additional negotiations, as needed, will take place as the parties decide how to structure the deal and draw up a contract reflecting its terms. The lawyers representing the two companies will negotiate the contours of the agreement until the final version is settled.
- Closing and integration: Finally, the deal is executed. The chosen method of integrating the company (merger or acquisition) is implemented, and steps are taken to bring the two businesses together. Asset transfers, employment changes, and other steps are needed to effectuate the deal.
Potential Challenges
Every merger and acquisition brings its own risks and pitfalls, but having experienced legal representation can help you resolve these matters and continue to finalize the deal. Possible challenges to small businesses include:
- Final valuation: The initial valuation will likely need to be adjusted as information is acquired during due diligence. However, if the final value is too far from what the merging or acquiring company assumed it would be, it may decide to back out of the deal.
- Legal and compliance issues: Buying or merging with a company means its problems will become that of the acquiring or merging business. While some legal and compliance issues are expected, the attorney conducting due diligence should make sure any significant matters are uncovered and addressed before the final paperwork is signed. Smaller businesses in particular must be mindful of this since they cannot bear the financial burden of these problems as well as larger companies.
- Regulatory approval: Businesses in certain industries must first obtain regulatory approval before the merger or acquisition can be consummated, and smaller businesses are not necessarily exempt from this. Make sure your legal counsel has explored all potential regulatory hurdles before agreeing to move forward.
- Business culture: When two companies become one, they must find a way to integrate their preexisting cultures. Smaller organizations in particular have their own way of conducting business. If the cultures are too disparate, there could be trouble integrating the companies down the road.
- Intellectual property: Not all small businesses appreciate the fact that they own intellectual property in their branding, trademarks, and by way of other assets. It is imperative that, whether you are the target company or the one acquiring or merging with the other business, you fully appreciate both your and the other company’s intellectual assets.
Let Our Experience Guide You and Your Organization
Regardless of whether you are entering a merger or acquisition, or the stage at which your organization finds itself, our seasoned business law attorney can assist. Call Capstone Legal Strategies to schedule your initial consultation today.