Acquisition Agreements 101

 

An acquisition agreement is an indispensable document in mergers and acquisitions. Here’s what a typical acquisition agreement for the sale of a business includes.

Entity Purchase vs. Asset Purchase 

An acquisition agreement should address whether the purchase is for an entity or its assets:

Entity purchase agreements, known also as stock purchase agreements, allow the buyer to purchase a business by buying a majority—and sometimes all—of its stock. The new owner adopts the role of previous owners, and normally assumes the business’s debts and obligations. 

With an asset purchase agreement, the buyer purchases the business’s assets, such as intangible property like trade secrets and copyrights, and tangible goods, such as real estate and office equipment. The corporate entity itself remains in the owners’ possession. When a buyer purchases a sole proprietorship or partnership, this is the ideal option because the business consists primarily of its assets. Without these assets, there’s no actual structure to deal with. 

Choosing Your Acquisition Model 

Businesses weighing their acquisition model must consider two key issues: liabilities for debts and other obligations, and taxes. An asset sale is usually better for the buyer in terms of taxes, since the buyer can depreciate assets. Sellers typically prefer entity purchases because they allow sellers only to pay taxes at the low capital gains rate. Sellers are often reluctant to do an asset sale with a C corporation, because this subjects them to double taxation—once for the business entity, and once for the shareholders. 

In terms of debts and liabilities, buyers usually prefer asset sales. This structure relieves the buyer of any obligations for the business’s debts unless he or she opts to take them on. With an entity sale, a buyer is responsible for all liabilities of the previous business following the sale. To seal the deal, however, shareholders or LLC partners may have to take on some specific liabilities, such as for recent loans. 

The type of acquisition agreement also affects ownership transfer, as well as factors such as whether agreements and leases can be transferred to the new owners. 

Help With an Acquisition Agreement 

For most owners, a business sale is a once in a lifetime opportunity. It’s something they do once—or, at most, a few times. So while they might be experts at running their business, they’re novices to the legal side of a sale. Acquisition agreements are complicated. A few changes in the wording can radically alter the deal. 

Owners should seek the wise counsel of an experienced M&A attorney. Your lawyer can help with the initial negotiations, the drafting of the formal agreement, and every other step along the way. If you’re working with an M&A advisor, he or she may be able to direct you to a qualified lawyer. Friends who have sold or bought businesses may also have referrals to lawyers whose counsel they found particularly helpful. If you don’t have access to these resources, ask your local Bar association about lawyers specializing in business transactions.

 

Succession Planning: An Oft-Neglected Component of Running a Small Family-Owned Business

Small businesses form the foundations of the U.S. economy. But they’re also often woefully ill-prepared for transitioning ownership—even though almost all will eventually undergo a transition. Poor preparation can harm the business, its staff, and everyone who stands to profit from a transition. Here are some considerations owners must undertake.

 

Do the owners understand the business’s fair market value?

The answer is almost always no. Owners tend to be excessively optimistic and emotional, viewing the business as far more valuable than it is. This makes it difficult for them to hear that the business is not as valuable as they hoped.

 

What steps have the owners taken to prepare for a change in ownership?

The statistics are grim. Only a quarter of businesses have a clear transition plan in place. Nearly a third have no plan at all. Asking an owner to plan for a future in which they no longer lead the business can be challenging. The next generation might not want anything to do with the business, and senior leadership may have no plans to take the business over.

 

Strategic advisors can help get the business on the right path. The two sides can work together to create a multi-year plan for an ownership transition. Some guidelines that may help include:

  • Reach out to a handful of advisors who specialize in your industry. You might find that different companies are best equipped to advise you and then value and sell the business. Sometimes a hybrid approach is best.
  • Seek an advisor who can provide you a fair market valuation. You’ll need to understand key value drivers so you can maximize the business’s value.
  • Create and then implement a succession and strategic growth initiative several years before you plan to transition. It’s best to begin the process three to five years in advance of a sale. In some cases, an even longer timeline may be ideal.

There’s no denying that transitioning a business can be stressful. An expert advisor can identify and correct key problems. Expert advice allows you to implement a workable succession plan. It also ensures that all aspects of the business, including financial, employee, tax, and other considerations, are addressed in a way that maximizes value and effectively markets the business. Choose that advisor wisely so you can ensure they have your best interests at heart.

 

 

Two Strategies for Dealing With Employees When You Sell Your Business

The way you address your business sale with your employees can ultimately affect the success of the sale. Owners, experts, and advisors typically advise one of two strategies. Some advocate complete transparency from the very beginning. Others argue that, when employees know a sale is imminent, their morale may deteriorate, along with their productivity. Here is a brief overview of the two strategies.

 

Keeping Employees Informed

Revealing your plan to sell your business doesn’t necessarily require that you share everything. Employees don’t need a detailed blow by blow of the process. Instead, stick to the big picture: the reasons for the sale, how it might affect them, and what you hope to achieve. Manage your staff’s expectations by giving them more information when the transaction is completed. And encourage them to discount any rumors.

Do you hope to sell to a buyer who will retain your existing employees? This information can ease employees’ fears of a job loss, and potentially keep them on board. If you can’t make such a guarantee, emphasize that a strong performance will serve as a safety net, encouraging the new owner to retain as much of the existing staff as possible.

If you feel uncomfortable telling your entire team about the sale, consider sharing your plan with just a few key employees. These should be people who understand the business, and who can therefore understand your reasons for selling, as well as your reasons for keeping the sale quiet. These employees will appreciate your trust in them, and see your willingness to share the sale as a sign of confidence.

 

Keep It Quiet

There’s no denying that a potential sale can spur anxiety, confusion, and even a mass exodus among employees. Knowing this is a compelling argument for keeping the sale under wraps. It may be best to adopt a business as usual approach, particularly in light of the buyer's need to secure financing, the need to ensure all contingencies are addressed, to manage leasing and escrow, and to address other issues.

Employees who know about a sale may even tell your customers. Anxiety about pending changes in management, quality or policies can cause your customers to flee to the competition at a time when this can be extremely damaging to your business.

But what if word gets out in spite of your best efforts? Confront the issue head on, because cover-ups and denials rarely succeed. Immediately convene a meeting to answer employee questions. Don’t delegate this vital matter to a subordinate, or address it only in an email. Address possible outcomes at the outset. That includes the possibility of positions being eliminated. Even if that conversation is a difficult one to have, a proactive stance is always the best stance. And if you’ve encouraged the new owner to retain your staff, you can share this information.

Put simply: by getting ahead of the rumors and being honest, you can ensure you provide information, rather than relying on the rumor mill to do so. Once the cat’s out of the bag, you can’t put it back in. So take control.

Also, a third approach is perhaps a hybrid approach, and although it may seem “unfair”, it’s probably the most truthful approach; that is DENIAL at ALL COSTS! In real world M&A circumstances, transactions are very, very difficult to get done, and can completely blow apart at the last minute (the closing table). It is simply not worth giving employees something extra to worry about that may never affect them. The truth is, the owner has ABSOLUTELY NO WAY OF KNOWING if his business will sell until the wire has happened and the ink is dry. The fallout from the thousand ways informing others can go wrong is simply not worth speculating over. There is a time to address all parties, and that is usually after the close! Buyers also feel their interests are best protected as well.