Written by G. Kenneth Little
There are a number of legal issues that potential buyers and sellers of an existing business should take into consideration before entering into any transaction. An experienced transaction team will make a significant difference to the purchase and sale process. These are three important things a buyer or seller should consider about their transaction team when preparing to buy or sell a business.
1) An experienced transaction team should be engaged early in the transaction process
Regardless of the size of the business for sale, an experienced business lawyer and accountant (“transaction team”) should be retained early in the process, ideally before either party enters into any negotiation, agreement (verbal or written) or transaction.
An experienced transaction team should consist at a minimum of a business (M&A) lawyer and an accountant. Any client contemplating the purchase or sale of a business should thoroughly interview potential legal and accounting advisors, and budget appropriately for the fees associated with the transaction.
Prior to engaging a potential transaction team, buyers and sellers should discuss any relevant transaction experience that the lawyers and accountants have in this area. Some advisors, despite being “business” generalists, may not have the necessary transaction experience to advise clients on all of the legal and accounting issues relevant to the purchase or sale of a business. Inexperienced advisors can ultimately be a hindrance to the client and the transaction, and can result in far higher legal fees for the client due to the advisor’s lack of familiarity with the nuances of the purchase or sale transaction at hand.
If the company being sold is a public company, there will be additional legal and financial reporting requirements. Buyers and sellers should therefore verify their transaction team’s relevant public company experience in the event that the transaction relates to a public company.
2) An experienced transaction team will protect both buyers and sellers
An experienced transaction team can assist potential buyers by properly structuring the purchase transaction in a way most advantageous to the buyer, while also identifying and managing the buyer’s potential legal risks. Identifying any potential risks or liabilities is indispensable to properly value the business and to protect the buyer from unknown risks such as: liens on any business assets, unpaid taxes by the business, and/or any legal judgments against the business or ongoing litigation or human rights complaints involving the business.
In contrast, an experienced transaction team will assist potential sellers by identifying in advance any legal issues or concerns that could affect the transaction so they may be discussed with the buyer and its advisors in a way that minimizes damage to a negotiation, while also maximizing the value of the business for the seller.
Typically, an M&A lawyer will assist on the purchase or sale transaction by:
- Advising on and negotiating any preliminary agreements, such as a confidentiality/non-disclosure agreement and initial term sheet/letter of intent prior to due diligence being conducted. These preliminary agreements generally protect the information being disclosed during the due diligence process and set out the initial terms of the transaction.
- Conducting a thorough due diligence and legal evaluation of the business being acquired. This is often done by both sides of the transaction, separately, with their respective transaction teams.
- Advising the potential buyer or seller on all of the legal risks and potential issues identified in the due diligence of the business.
- Advising the buyer or seller on the most advantageous way to structure the transaction.
- Drafting the final transaction agreement, including:
- Negotiating the structure of the transaction.
- Negotiating the method of payment of the purchase price.
- Negotiating for any warranties or indemnities under the transaction, as necessary.
- Negotiating for other issues related to the transaction such as retention and transition of employees, non-competition or non-solicitation of the seller, and/or any leases of the business premises.
- Ensuring that all legal steps are taken to effect the transfer of the business from the vendor to the purchaser, including necessary filings and adjustments or holdbacks from the purchase price.
- Being a sounding board to the client for all legal issues.
An accountant will assist on the purchase or sale of a business by:
- Conducting a financial valuation of the business.
- Reviewing all financial statements and records of the business in order to identify potential accounting or tax issues.
- Working with the lawyer to structure the transaction in the most beneficial manner for the client.
- Calculating adjustments to the purchase price of the business.
- Being a sounding board to the client for accounting, tax and valuation issues.
3) An experienced transaction team will advise on the best structure for the transaction
A transaction team will advise its client (either as a potential buyer and seller) on the most advantageous way to structure the transaction. Different tax considerations and liability issues will arise depending on whether the transaction is structured by way of an asset purchase or share purchase of the business.
In an asset purchase, a buyer can buy some or all of the assets of the business, whereas a buyer under a share purchase buys the entire business with no exclusions. Generally, buying a business by way of an asset purchase is more advantageous to the buyer, whereas a seller will prefer to sell a business as a share purchase.
Carscallen LLP’s M&A experience
Carscallen’s team of experienced M&A lawyers can assist both buyers and sellers selling a business. We have extensive experience in advising on purchase and sale transactions for both private and public companies. We can help you understand your options, identify potential issues and how to overcome them, and negotiate the most beneficial terms for your position.
Contact any member of our Mergers, Acquisitions & Divestitures team with questions you may have about buying or selling a business, or any other business-related issues.
*This update is intended for general information only on the subject matter and is not to be taken as legal advice.