By Stewart L. Muglich
Buying or selling a business can be a complex matter, depending on the nature of the business being acquired or sold and the structure used to effect such a sale. Every such transaction is unique, and the considerations faced by a buyer – as opposed to a seller – can be very different. That being said, there are certain issues and considerations that typically arise in most purchase and sale transactions.
These include:
· The basic deal structure – asset versus shares.
· Negotiating – preliminary agreements.
· Due diligence.
· Financing considerations.
· The purchase and sale agreement.
· Risk allocation.
Basic deal structure: asset versus share transactions
Appropriate structure is critical to the success of a deal. Common wisdom suggests that you always buy assets and sell shares (potential liabilities flow with buying the business as a whole, which is what would happen if you bought all of the shares), but this does not take into account the reality of many business situations.
These situations include:
· Tax considerations.
· Due diligence considerations.
· Key deal terms, including representations and warranties, allocation of purchase price, allocation of consideration, and restrictive covenants.
Negotiating: preliminary agreements
The confidentiality agreement and the letter of intent can set the tone for further negotiations between parties and serve to assist in bringing issues to light.
A confidentiality agreement/non-disclosure agreement:
· Allows the parties access to confidential information to allow them to further assess a transaction.
· Applies in transactions where the parties are concerned about disclosing information to parties that could include potential competitors.
· Should be executed if there are any concerns regarding the use of information being disclosed.
· Requires a mutual agreement if both sides are exchanging information.
· Includes the length of the confidentiality restriction for key elements of the agreement and the most heavily negotiated provisions.
A letter of intent/exclusivity agreement:
· Should be used when the parties wish to set out preliminary terms but are still negotiating and carrying out investigations.
· Should take care to reflect the parties’ intentions regarding whether they wish the letter of interest to be binding.
· Should heavily negotiate the exclusivity provisions.
· Should reflect the need for specific considerations to address asset versus share purchase transactions.
Due diligence
Effective due diligence allows parties to identify issues early in the transaction, which ultimately will allow the parties to determine a fair price and ensure they are going into the transaction with all available information.
Due diligence typically consists of:
· Preparing a request list and a due diligence report.
· Conducting a corporate minute book review.
· Conducting corporate and legal searches and analyzing results.
· Reviewing material contracts.
· Interviewing employees, suppliers and customers.
· Carrying out an industry analysis.
· Financial due diligence.
Financing considerations
Business realities often dictate the appropriate financing structure for a deal. While there are many types of financing, the following are the legal considerations related to debt financing and the financing mechanics for a secured loan transaction:
· Structure of the loan agreement and loan covenants.
· The role and types of security.
· Registering security.
· Ensuring that loan covenants have been satisfied.
· Ensuring that the lender is in a position to fund.
Purchase and sale agreement
The purpose of a purchase and sale agreement is to turn a corporate deal into an effective contract.
The principal provisions of the agreement include:
· Purchase price and deal-specific terms.
· Representations and warranties.
· Closing conditions, termination rights and their effect on closing certainty.
· Indemnities.
· “Boilerplate.”
Risk allocation
Drafting financial terms in purchase and sale agreements requires both an understanding of accounting concepts and common sense. Financial provisions typically encountered in corporate deals and the issues surrounding those terms include:
· Purchase price determination and post-closing adjustments.
· Escrow provisions.
· Earn-outs and reverse earn-outs.
· Financial representations and warranties.
Final considerations
Proper planning can avoid unnecessary delays in closing a deal. In order to effectively do this, the parties must thoroughly prepare for closing. The best way to ensure that the hidden pitfalls are avoided is to have a proper team of professionals involved to guide the parties through the numerous steps of a purchase or sale transaction. At a minimum, any given transaction should have an experienced lawyer and accountant involved to handle the myriad issues that can arise.
Watch: Stewart L. Muglich and Brendan J. Craig provide advice on how to successfully buy or sell a business
For more in-depth information about the foregoing please contact Stewart L. Muglich or refer to the Canadian Bar Association's Skilled Lawyer Series at http://www.cbapd.org/sls.
The foregoing is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, please contact the author, who would be pleased to discuss the issues above with you, in the context of your particular circumstances.
