November 29, 2012    


Posted on November 29, 2012


Money in handEventually, all good (and bad) things come to an end. While it is true that some companies last an extremely long time and some companies do get passed down from generation to generation, the overwhelming majority of businesses come to an end. Because no one person can work forever, business owners must contemplate an eventual transition or exit. Exits come in all shapes and forms, good and bad and everything in between. Investors will always focus on an exit (they need their money), and with the public markets difficult to access, a merger provides the desired liquidity. But beyond this concrete example, the reasons to merge are endless: owners transitioning, strategic consolidation within the industry, business owners just wanting something (anything?) to get out.

Having practiced in this area for over 15 years, a short article on mergers might seem easy. However, when you are seriously considering a merger, the typical themes – stock versus asset, valuation, due diligence, employee issues standard representations – transcend a short article. For the business owner who is thinking about selling (and really everyone should always be at least thinking about it), I want to give some tips I have picked up along the way and explain some of the seemingly endless contradictions that come in this area of business.

First, a merger takes a long time, but it can be done in a real short period of time. For sellers, mergers should be thought about in the long term. From a business perspective, you will want to know when in the cycle you are selling, you will want to prepare, you will want all due diligence issues sorted out. If you start talking to purchasers without having your proverbial stuff together, your business presentation is off, and ultimately, issues cost you money. However, except regulated industries and large mergers that require antitrust review, a transaction can close quite quickly. Yes there is some work, but if everyone (company and advisors) has their proverbial stuff in order, it can happen quite quickly.

Which leads me to the second contradiction – price is the most important thing, but personality is the most important thing. Money is at the heart of all deals, but the personalities involved drive the discussion. Mergers almost always involve a career transaction for at least one, and usually more, individuals. At a minimum, an owner who prior to the merger control will no longer have control post -merger. Employees are typically affected also. As a consequence, these very emotional human issues move, halt, change, and shape the merger discussion. But one should never lose sight of the ultimate driving force – the money.

And the money is determined again in a contradictory manner – by consistent formula and financial calculation culminating simply in the arbitrary agreement between a willing seller and willing buyer. Industries often have metrics upon which companies are bought and sold; sometimes a one times revenue formula is used, sometimes a multiple of EBITA, sometimes book. However, because a deal relies solely on a buyer reaching a contract with a seller, religious adherence to a formula is futile. Sometimes the parties would be better off throwing a dart at a range of numbers to get a deal done.

And the contract itself presents an array of contradictions.

Stock versus asset is a crucial question. Are you going to buy all of the assets of the company or purchase the stock? This is important as the liability and taxes are structured one way in one deal and another way in another. An asset sale usually provides a purchaser with additional liability protection and is often favored in situations where there is liability. However, a lot of liability transfers with the good will of the company, so an asset purchase agreement has its limitations with respect to liability concerns.

Reps and warranties and indemnification are important. In negotiating contracts, the representations and warranties – what a seller says about his or her company – become a crucial part of the contract. A seller will then indemnify the purchaser for any misrepresentation. These are important if any issue post-closing comes up. Of course, a seller can still get sued for fraud, and an indemnification is only as good as the money the seller has after closing.

Because of all of these contradictions, securing and listening to advisors who have experience in mergers is crucial. These advisors know how mergers work, and as a consequence, bring familiarity to a process that is unfamiliar to you. They should have the experience that is necessary to advise you throughout the process. However, as with everything in mergers, ultimately you are the person responsible. Whether you are paying for the business or selling a business, the responsibility lies on the business owner to help drive the process and not be driven by the process. Listen to your advisors, but don’t have blind faith in your advisors.

Mike Goodrich
Goodrich Law Firm, LLC



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