Are you an international Entrepreneur Buying or Selling a Business in the U.S.?
Get expert help with Business Mergers, Acquisitions & Dispositions
Part of expanding your business within the U.S. might be through mergers and acquisitions. These processes are the transfer of assets, liabilities, and ownership from one business to another.
Mergers and acquisitions (M&A Business Transactions), like businesses, can be intricate and complex. The different processes in play can be confusing and complicated. Even a seemingly simple business transaction, such as a private company looking to transfer an existing business to a newly created separate subsidiary, can cause headaches without support and advice to guide you.
At Mount Bonnell Advisors, we work with attorneys who regularly provide skilled legal assistance to business-owners buying or selling businesses in the U.S.
In this guide, we’ll take a look at some of the key things to know about Mergers & Acquisitions and how Mount Bonnell Advisors can help you at every step of the way.
On This Page
- Mergers & Acquisitions – Know the Difference
- Stock Purchase Vs Asset Purchase
- Sellers Liabilities
- Existing Business Contracts and Acquisitions
- Selling Your Business
- Selling a Business in the U.S. – Key Things to Know
- Letter of Intent
- Preparing Business Organization Documents
- Preparing Business Financials
- Valuing the Business – Purchase Price
- Intellectual Property
- Non-Compete Agreements
- Seller’s Transition Services
- Frequently asked questions (FAQs) about taxes, company formaition, and residency in the U.S.
- Get advice on taxation, company formation, and residency in the U.S.
When distinct corporations want to become one corporation, united by shared assets, they use Mergers & Acquisitions as the legal method for achieving this. Many people get confused about the differences/don’t believe there are any differences between mergers and acquisitions because of popular phrasing in common between these two legal devices. However, there are subtle, yet important differences between the two.
An acquisition is when a company absorbs the rights, assets, liabilities, and debts of another one. It can also occur through the complete purchase of all the stocks/assets of another company.
On the other hand, a merger occurs when two companies agree to become a single business. Therefore it is the mutual agreement between the two businesses that make the difference between an acquisition and a merger. Acquisitions result in the surviving entity succeeding to all the rights and obligations of the acquired business.
At Mount Bonnell Advisors, we work with skilled corporate attorneys who have experience handling mergers & acquisitions representing both buyers and sellers. Get in touch today to find out more about the legal process and how we can assist you to buy or sell a business in the U.S.
Most acquisitions take place through stock or asset purchase. If an entity decides to purchase assets, issues surrounding each individual asset and its liabilities must be considered.
If stock is purchased the acquisition results in a transfer of ownership of the business itself. However, the business entity that the stock is purchased from continues to own the same assets and liabilities.
There are advantages and disadvantages structuring an acquisition by a stock purchase or an asset purchase. These will need to be weighed by the seller who is selling their business and the buyer who is buying.
Advantages & Disadvantages of Stock and Asset Purchase
In an asset acquisition, the liabilities of the business from which the assets are being purchased don’t generally follow the assets. The exception to this is if successor liability is imposed.
In a stock purchase transaction, the buyer will take on liabilities, including some which may be unknown, and might reduce the value of the entity’s stock. In these cases, it is possible to mitigate this risk factor by incorporating certain indemnification provisions – but these only work to the extent that the seller is able and willing to honor these agreements.
In asset acquisition, all assets need to be assigned to the acquiring entity. This can include titles, deeds, commercial leases, and customer and vendor business contracts, which can add additional time and expense. In addition, certain licenses, certificate, and registrations will not be able to be assigned and the acquiring entity will have to apply for them independently. This can sometimes be a time-consuming process.
In stock acquisition, the titles to assets, including the licenses, registrations, certificates and other business contracts will be maintained within the acquired entity. This will cut out the need for transfers.
It’s important to consider tax implications when it comes to choosing whether to structure an acquisition via stock or asset purchase. The buyer and seller will generally consider the amount of the owner’s net after-proceeds, any gain recognition by the company and whether the buyer wants to assign a high basis to the assets for depreciation purposes.
Seller liability connected to the business being acquired is one of the most important things to consider when deciding whether the acquisition will be structured as stock or asset purchase. Seller liability is also termed “successor liability”.
In most transactions, the buyer aims to avoid responsibility for the seller’s liabilities. This is to try and avoid the nightmare situation of undisclosed and costly liabilities that come to light after closing and attach themselves to the acquired business.
If a business acquires the stock of another business this potential situation can occur. That’s because when purchasing stock, the transaction results in a change of ownership and the obligations and liabilities associated with the acquisition remain with the acquired entity.
In many cases, efforts can be made to guard against potentially negative outcomes by the buyer’s attorneys contractually excluding certain obligations, strengthening seller’s representations and indemnification provisions, or asking for money to be set aside in Escrow. However, if anything goes wrong, the buyer will still be left with the liability.
When buying assets, seller liability can be avoided by forming a new entity in order to acquire the assets that are transferred. Generally speaking, any liabilities of the business that are related to the assets being acquired do not follow those assets.
In all cases, it’s essential that careful planning is undertaken to ensure that any potential liabilities are understood when the acquisition transaction takes place.
Every business has a host of contracts that affect its operations. When undertaking acquisitions it’s important that the business contracts that the business is committed to are reviewed and understood. This is so that the proposed transaction will not violate any of these existing duties or obligations.
These third-party obligations might include things such as real estate leases or employment agreements, which are often continuing relationships. These contractual relationships must be considered to ensure their benefits aren’t lost or that the seller will not be in breach of any agreement as a result of the acquisition transaction.
A buyer might want to take advantage of target business contracts such as:
- Customer contracts
- Vendor contracts
- Commercial Leases
As well as gain other benefits such as intellectual property rights, permits, certifications or licenses. In these cases, a stock purchase is often chosen so that there is no need to assign each of the business contracts or ask for permissions to assign business contracts.
However, a buyer who wants to make an asset purchase will need to check that business contracts are freely assignable otherwise they will have to get the consent of the third party who is bound to the contract.
U.S. businesses may choose to sell their business for a wide range of reasons. It’s important during the mergers and acquisitions process to have an understanding of the reason for selling, and for that reason to be credible. Most potential buyers want to know why a seller wants to sell, and this is one of the first questions they will ask.
The reason buyers want to know about the reasons for selling is that they will know very little about the operations of your business. They will want a legitimate and reassuring reason why the business is being sold. Therefore, a well-prepared and understandable reason for selling can alleviate anxiety on the buyer’s part. This can help to start the mergers and acquisitions process more smoothly.
The attorneys working with Mount Bonnell Advisors have plenty of experience with understanding the reasons why sellers might wish to sell their business. Some common reasons are:
- Health & medical reasons or retirement
- A desire for additional capital to expand the business
- There is a business succession plan in place
- The business needs more management and employee infrastructure
- The owner has decided to move to a new geographical territory
- Marketplace competition
- Personal financial necessity
Even if you have been through an acquisition process before, selling a business in the U.S. can be overwhelming. The success of your sale depends on you getting the right advice and engaging skilled business accountants, advisors, and corporate lawyers. Many corporate law firms will have established relationships with business accountants and advisors if they regularly handle acquisitions transactions.
Because there is a lot of overlap between the paperwork and processes that need to be reviewed and put together by the business advisors, accountant, and attorney, it’s advisable that you find a team who can work together effectively and efficiently.
Many businesses find that delays in the acquisition process occur when different professionals are unable to communicate well or coordinate their work for you. This can cause unnecessary hold-ups in the early stages of the acquisition. It can also put you on the back foot as your buyer will have a team of professional advisors working for them to get them the best deal.
Will a Business Broker be Involved?
Business brokers and brokerage firms are sometimes involved in the marketing and negotiation of the sales of the company being sold. However, it isn’t a requirement that the seller engages a business broker. The seller may choose instead to market and negotiate the sale on their own while collaborating with their own team of professionals.
Generally speaking, a business broker will focus on connecting the buyer and seller and then step back once the acquisition process begins. Then the professional teams of each party consummate the deal. Typically a business broker’s fee will be a percentage of the total purchase price – around 10-15%. These fees are negotiable and the seller should take advice from a business attorney before moving forward with any brokerage contract.
Once the initial stages of acquisition are underway, both parties will usually want to be clearer about the terms of sale of the proposed acquisition. The business selling will need to understand the purchase price the buyer has in mind, as well as what sort of structure they were considering for the deal before they consider moving forward. The seller will be reluctant to offer further detail about their business than strictly necessary unless they have some kind of assurance the deal will go ahead.
A letter of intent (or memorandum of understanding) is therefore drawn up and signed by both parties. This is a critical milestone in the mergers and acquisitions process. Although this document is not legally binding, it shows both parties are committed to the deal moving forward. It will include aspects such as fundamental terms, price, agreement on major business points, and will also set out buyer exclusivity for a certain period of time (often 30 says).
For this reason, it’s extremely important to be careful and precise during the drafting of the LOI to avoid misunderstandings between the parties which could cause difficulties further along the process.
Most businesses will have well-kept documentation reflecting the internal operations of the business and how the business is operated. However, some businesses, and in particular smaller businesses have not maintained their business documentation well over the years.
Organizational documentation can include documents such as:
- The operating agreement
- Shareholder agreements
- Articles of incorporation
- Sales agreements
- Client agreements
If these documents are not up to date they must be updated to reflect how the business currently operates. A corporate lawyer must be engaged at the very beginning of the acquisitions process to ensure aspects such as correct documentation are in order. Neglecting this can cause deals to be delayed or even collapse altogether.
Like business organizational documents, it’s very important that financial documents are up to date. A potential buyer will need to see up to five years worth of paperwork such as:
- Profit & loss statements
- Bank statements
- Tax returns
- Commercial Leases
- Customer / client contracts
- Vendor and supplier contracts
Having these records in order is vital to moving forwards in the acquisitions process. They need to be appropriately prepared and not include any misleading statements.
One of the most important things to consider when selling is the purchase price. There is a range of factors that can go into the decision of what price to set, but the bottom line is a business will sell for the amount the buyer is willing to pay.
Generally speaking, business lawyers do not undertake primary advising regarding the valuation of a business. There are three main ways that a business can be valued, however:
- Using the income approach
- Using the asset-based approach
- Using the market approach
However the valuation takes place, the seller needs to end up with a clear idea of both what they are willing to accept offer-wise and what sort of range of offers they can expect to receive.
At Mount Bonnell Advisors we regularly work with lawyers who are able to counsel sellers and buyers about a range of intellectual property issues. This is crucial for the M&A process because intellectual property is one of the most valuable assets of any business.
It’s critical during the initial stages of the acquisitions process that the buyer conducts a due diligence of their target businesses intellectual property. This can include assets such as copyright, patents, trade secrets, trademarks, domain names, and licenses.
A prospective buyer will often want to include a non-compete as part of the acquisition transaction. They may also wish to incorporate other restrictive covenants. It’s incredibly important that these covenants are carefully scrutinized. When it comes to a non-compete covenant, generally speaking, the buyer will want to ensure the seller does not compete for a period of 3-5 years in a specific geographic territory (often a radius around the current business operations and areas it may be expanded into).
If a non-compete covenant is agreed to then usually the seller should receive an extra monetary amount if they are to be prevented from engaging in a business that could compete with the acquiring company.
During the early stages of planning an acquisition, it’s helpful for the seller to decide whether they will be happy to provide transition services to the buyer once the deal has been closed.
The buyer will often want the seller to provide transition support in the form of consulting because the seller is obviously familiar with all the intimate details of the business and its customers. Depending on what is negotiated the seller’s services might be provided for no additional compensation or the buyer might hire them as an employee or independent contractor.
In many cases, the prospective buyer will pay additional compensation beyond the target purchase price for the seller’s transition services.
Frequently Asked Questions (FAQs) About Taxes, Company Formation, and Residency in the U.S.
Starting a business in the U.S. can be both exhilarating and exasperating. There is much to know and even more to learn, and the pace of the information coming at you can be overwhelming.
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Whether it’s technical issues around tax or residency, or strategic ones involving business formation and growth, the experienced team at Mount Bonnell Advisors are here to help.
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