Posted: 12:57 pm Tue, September 18, 2012
By Dan?Heilman
Tags: Hellmuth & Johnson, James A. Wahl, Katheryn A. Andresen, Lommen Abdo Cole King Stageberg, mergers and acquisitions, Monroe Moxness Berg, Roger Stageberg
Image: Dreamstime
During its lifetime, every business will do at least one of two things: close or change hands.
But the art of completing a merger or acquisition contains a number of legal steps to keep in mind for both the buyer and the seller.
Attorneys who deal with M&As say that the majority of the counsel they offer is to small-business owners looking to sell.
?I get M&A calls all the time, and at least half the time it?s the founder wanting to cash out his investment,? said Roger Stageberg, a business attorney with Lommen Abdo Cole King Stageberg in Minneapolis.
The first step in preparing to navigate M&A law is simple: The day you begin a business, know that one way or another, one day you will leave it behind. Prepare for that day by having an exit strategy and making sure that your business will be legally ready to be sold.
?Every business owner should go into it with the idea that they?ll exit in some fashion at some point,? said James A. Wahl of Monroe Moxness Berg in Bloomington. ?What needs to be done to maximize the value of the company when you?re set to sell? Unless you have a truly one-person business, there?s always the opportunity to transfer ownership to someone.?
Often, that transfer is to someone the owner knows: Children, an employee, a client, even a competitor. Even in relatively friendly transactions like those, you need to be prepared. The first thing to know is to not try to do it yourself. Talk to your lawyer, your accountant and even an M&A broker to make sure your interests are being covered.
?Tell them your motivation,? said Stageberg. If they?re experienced in M&A matters, you?ll come away knowing about 90 percent of how the deal is going to go. They?ll ask you to tell them what you think your business is worth, and they will give you some guidelines to what it?s really worth.?
You can get that process started by going through your financials and putting together realistic projections of sales and profits for at least the balance of this year and one additional year.
Make sure you have all of your business documentation organized and easy to find. An attorney can provide a list of documents a prospective buyer will want to see, such as financial statements, financing agreements, debt instruments and other corporate documents that a buyer is sure to ask for when doing their due diligence prior to a sale.
?Maintain the proper legal records,? said Wahl. ?Make sure licenses and corporate documentation are current and that copies of leases or other agreements related to operation of business are up to date and accessible so that the buyer can review those.?
Wahl even suggests consulting with your landlord, if you don?t own the property that houses the business, to see if your lease is assignable.
And don?t try to fudge the numbers. All M&A agreements have the seller making representations and warranties. If those turn out to be incorrect, the M&A agreement will likely provide indemnification for the buyer, according to Stageberg, so be sure to provide audited balance sheets.
?If after the deal closes, the buyer finds out that one of those sales was phony ? they sold it to a neighbor who sold it back to them the day after the year ended ? that would be a material misrepresentation,? said Stageberg. ?In that case, the buyer would be in a position to get his money back.?
What are your licensed workers worth?
Conversely, if you?re looking to buy, make sure the current owner has all his or her paperwork in order.
?If there are trademarks involved, check the U.S. Patent and Trademark Office database to make sure they?re registered,? said Katheryn A. Andresen, a partner at Hellmuth & Johnson in Edina. ?Same with patent: Have they maintained their intellectual property? Are their logos and slogans protected? Those things won?t help the buyer if they?re not.?
Hellmuth & Johnson represents a number of construction and real estate companies, and Andresen said industries such as those present their own M&A legal issues when a sale is looming.
?Those industries are more regulated and a lot of the value that goes into them is personnel,? Andresen said. ?The licensed personnel are part of the brand that?s been created. If the company you?re selling has 10 licensed contractors, what kind of employment agreements are going to go along with those employees? Construction and real estate companies have to consider those things.?
To reinforce the level of trust between buyer and seller, some M&A agreements contain provisions that let the buyer pay the majority of the purchase price upfront, with the balance being put in a bank as escrow, or will provide a promissory note saying they?ll pay the balance two years from now once they?re sure there are no misrepresentations.
And given the complex nature of a business acquisition, both parties should be prepared to be patient.
?Be reasonable about the expectations of how things will close,? said Andresen. ?You can do the general business terms over a handshake, but getting from that point to the actual documentation can take time.?
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