small business adviser
By James M. Selle

Growth: It’s the common strategic goal of many businesses, regardless of size, but internal growth is often deemed too slow or impractical. Mergers with, or acquiring the stock or assets of, an existing business can accelerate expansion, whether into additional products or services, into new geographic markets, or into a competitor’s customer base. Whether structured as a merger or a purchase of stock or assets, a myriad of issues arise and warrant careful consideration and scrutiny.

Once a target is identified and contacted, either directly or through an intermediary, negotiations may commence quickly, and certain precautions should be considered at the outset, such as a mutual nondisclosure agreement, to protect confidential information. As discussions progress, a letter of intent may be useful to outline preliminary terms of the deal, to prohibit discussions with other potential suitors, or to address other issues before a definitive agreement can be negotiated, prepared and signed.

An acquiring party may also prepare and submit to a target company a due-diligence checklist aimed at flushing out various information and issues. Checklist items should include: (1) ownership (including organizational structure and documents relating to the target and any affiliates), (2) assets (including real estate, equipment, inventory, and intellectual property such as copyrights, patents, and trademarks), (3) contracts (including leases, licenses, and other asset-related documentation, as well as agreements with customers, suppliers and other relevant parties), (4) outstanding debts and other existing or potential liabilities, (5) financial performance, (6) tax matters, (7) operations, (8) management, (9) employees, (10) benefit plans, (11) insurance, and (12) lawsuits or other disputes.

Due-diligence review can also encompass a wide range of other matters that may be significant in evaluating, structuring, and documenting the proposed transaction. Various searches of public records can be conducted to determine whether any liens or other encumbrances affect relevant assets.

Advisers can be engaged to assist in valuing assets (as well as liabilities), and determining appropriate purchase-price amounts or other consideration (such as earn-outs contingent upon future performance). Advisers and counsel can also help structure the transaction to minimize adverse tax consequences and potential liability exposure. When acquiring a new line of business, a separate subsidiary or other affiliate can be formed to carry out, and isolate liabilities arising from, such business.

The structure of the transaction itself may create a need to focus particular attention on liabilities. In mergers and stock purchases, assets and liabilities generally continue with the surviving or continuing entity. While transactions are often structured as a straight purchase of assets for purposes of avoiding assumption of liabilities, the potential for successor liability still exists in such transactions, especially in regard to certain tax obligations.

Addressing the exit, or continuing involvement, of the target’s owners or managerial personnel is not only crucial, but often one of the more difficult aspects of any merger or acquisition. Whether departing or staying on following the transaction, noncompete agreements should be addressed and documented as appropriate. The two parties should take care in confirming any continuing employment, consulting, or other relationships.

In documenting a transaction, many other issues typically need to be addressed, including representations, warranties, indemnification, conditions to closing, remedies, boilerplate provisions, and related contracts and other matters specific to the deal at hand. Definitive documentation for such a transaction can take many forms and range from being relatively simple to extremely complex. Typically, a balance is struck based upon the size and scope of the transaction, although the dollar amount of a deal is not always indicative of its complexity.

While growth through mergers or acquisitions is a means to an end, the means must be evaluated, formulated and implemented carefully, and often creatively, to avoid an unpleasant or unexpected end.

Jim Selle is a partner with the law firm of Stinson Morrison Hecker LLP. He can be reached by phone at 816.691.3205, or by e-mail at jselle@stinsonmoheck.com.