Mergers and Acquisitions: Transactional Forces and Process

Mergers and acquisitions.  Investments of capital.  Changes of ownership.  Merger and acquisition trends track closely to the larger economy.  2015 saw historically high transaction rates.  According to Deloitte’s Year-End Report, “[2016] started with a thud…But in October, US companies unleashed an unprecedented wave of deals, making it the busiest month ever for domestic M&A.”  On a local level, our law firm is experiencing an increased rate of corporate transactions.  Something is buzzing.

Every deal is unique, but our transactional attorneys find that most deals generally follow larger economic trends.  One never knows exactly how these larger trends will impact a given business, yet is it always helpful to revisit the basic steps of a business acquisition or merger:

• I Like You; You Like Me – The different ways people arrive at the idea of a business transaction are fascinating. Networking with friends, business brokers, trade journal advertisements, industry research, etc.  People eventually connect.  Once they connect, business factors come to the forefront of the relationship.  One party is interested in purchasing some portion of an ongoing business.  The other party is giving up some degree of business control and expects compensation.  If the parties are serious about discussing this dynamic further, they should look deeper into financial aspects of the deal.

• Confidentiality Agreement / Non-Disclosure Agreement – Many potential deals come to fruition. Most do not.  Before discussing business information that is not publicly available (e.g., pricing, revenue levels, etc.), the parties should agree to keep any such information private.  A simple NDA (non-disclosure agreement) should identify the potential deal that is under consideration and the type of information that is protected from public disclosure.

• Letter of Intent – After reviewing business operations and financials at a high level, the parties generally agree on a purchase price. The purchase price and basic tenets of the deal are spelled out in a letter of intent which the parties sign.  The letter of intent is often non-binding, pending the results of the purchaser’s due diligence investigation.

• Due Diligence –The potential seller usually makes general representations about the operations and finances of the business. The potential buyer should then investigate deeply. Financials should undergo a thorough review.  Operational issues associated with a change in ownership should be identified and discussed (employees, leases, environmental liabilities, inventory, etc.).

Purchase Agreement – The parties legally agree to transfer business control.  The deal is usually binding at this point.  An attorney should prepare the purchase agreement, and each party should understand its contents prior to signing.  The agreement will establish the mechanism for transferring the purchase price in exchange for business control.

By: Chad J. Cochran