Mergers and Acquisitions can come in many forms. A merger is taking two or more things and making them one. The same is true in business. A merger can take the form a two companies merging to form one company. A merger can also be thought of a merging one company into another, most typically a larger company merging a smaller company into the larger company. An acquisition or purchase of another company can be done by an individual, a group of individuals, or a business entity such as a sole proprietorship, partnership, personal corporation (S corporation or S Corp.), C corporation (or C Corp.), professional corporation (P corporation or P Corp.), or a limited liability company (LLC). After an acquisition, sometimes the acquired business is ran as a separate entity, is merged into another business, or is ran under the umbrella of a larger company often referred to as the parent company. Sometimes two entities that are both under the same parent company are referred to as sister companies.
Business mergers and acquisitions often include a covenant not to compete for selling owners and key employees. Sometimes employment contracts are also included for key employees or executives. There may also be stock options or stock warrants based on future performance of a company. Some business purchases may be financed utilizing government guaranteed loan programs such as Small Business Administration loans (SBA loans or SBA guaranteed loan programs), or through United States Department of Agriculture Business and Industry loans (USDA B&I loans or USDA BI loans). It is wise to discuss business entity types with both a CPA and an M&A lawyer / M&A attorney before establishing the entity. For more information on business entities, visit the business entities page at MentchLaw.com. For more information on contracts, visit the contracts overview page and construction contracts supplement at MentchLaw.com.
Alternatively, some individuals or entities purchase or lease a franchise or franchise license, from a typically much larger entity with an established trademark and/or trade name. The person or entity selling or leasing the franchise rights is the franchisor. The franchisee is the person or entity purchasing or leasing the franchise rights. The franchise contract may have upfront purchase fees and/or ongoing fees or royalty fees. The franchisor may provide guidelines for operation, appearance and signage, and may even have a supply contract for goods and/or services with the franchisee. Some fast food restaurants, some chain restaurants, and some stores can be examples of franchises. A franchise lawyer / franchise attorney can assist with franchise contracts.
It may be wise before the purchase or sell of a business entity to obtain a business valuation from a certified business valuation specialist. Two keys that a business valuation specialist may look at include earnings before interest taxes depreciation and amortization (EBITDA), and seller’s discretionary cash flow (SDCF). Both can be important factors not only in valuation of the business, but also in anticipated future capital available for repayment of business acquisition loans. Seller’s discretionary cash flow takes into account the sellers discretionary cash flow in addition to EBITDA. For instance, the selling owner may have had an annual salary of $500,000.00 per year and many perks such as luxury company vehicles. The new owner on the other hand my instead take a salary of $100,000.00 per year and no company vehicle. This might leave additional capital not counted in EBITDA that can be used to repay business acquisition loans. In addition to profit and loss and assets on the balance sheet, a good certified business valuation specialist may also take into account several other factors. Factors can include the economy, geographic location of the business, type of business, recent sells of similar businesses, North American Industry Classification System codes (NAICS codes), Standard Industrial Classification codes (SIC codes), asset sale vs. stock sale, cash sale vs. seller financing over time, price adjustments based on future performance, and multiple other factors.
Business breakups can come in different forms. Sometimes an individual dies, retires, wants to exit the business, or can’t get along with another owner(s). There may be a desire to terminate or wind down the entity, or more commonly to buy out a partnership partner, LLC member, or corporate shareholder. Proper prior planning in corporate bylaws, LLC operating agreements, and partnership agreements, can address many future issues and how they are to be handled.
Buyout agreements including stock sale purchase agreements may contain many parts including terms of the buyout. The buyout can be for a onetime fee sometimes referred to as a cash buyout. Alternatively the buyout can take place over time with payments over time. Some payments over time may be based partially on company performance, or employee performance if the selling owner is staying on as an employee for a while. Buyout agreements may include or refer to non-compete agreements or employment agreements. Other critical terms can be current profitability, cash on hand, distributions of profits, and how certain taxation issues will be handled. For tax flow-through entities or pass-through entities, it is critical to look at timing issues for shareholders, members, or partners to avoid individuals being taxed for gain not distributed and vice versa. A CPA should be involved for these issues along with the transaction lawyer / transaction attorney. Other issues that may be addressed in a buyout agreement include but are not limited to, management rights, rights to sign contracts, rights to sign checks and banking instruments, signing of government and tax forms, indemnification issues, future liability, liability for past issues, warranties of buyer and warranties of seller, representations of buyer and representations of seller, business sale or stock sale closing details, confidentiality agreements for company confidential information and transaction details, and other contract clauses described in the contracts overview page and construction contracts supplement at MentchLaw.com.
For more information on stock sales vs. asset sales visit the stock sale vs. asset sale page at MentchLaw.com.
Attorney Kirk E. Mentch, Esquire
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