Acquisitions are complex transactions, especially when the selling company is unfamiliar with all of the issues present. John Willding, a Mergers and Acquisitions attorney from Dallas Texas, feels that one of the most common problems that companies experience in mergers and acquisitions is the failure to identify or understand the most critical issues before closing; business owners need to understand these issues and plan accordingly. Catching problems before they become major deal-breakers will make it less likely for a transaction to fail at the eleventh hour. In this article, readers will learn several important M&A topics that should be addressed during negotiations — from intellectual property to representations and warranties.
In any acquisition, numerous issues may arise after a purchase price has been negotiated, and a Letter of Intent has been negotiated. Some of these issues are vital for the buyer to be aware of, while others may never pose a problem. The following is a list of common M&A issues that may arise after a Letter of Intent has been negotiated:
Intellectual Property Issues
Intellectual property ownership and rights can be difficult to ascertain, especially in today’s age of technological complexity. Patents are often outlined during negotiations, but copyrights and trademarks are not always laid out on paper before closing a deal. Both parties need to understand the current intellectual property landscape for any new entity that might be created through merger or acquisition. John Willding describes this as ensuring there isn’t any intellectual property that could ultimately prevent the buyer from fully monetizing the target company’s intellectual property.
Deal Structure/Financial Issues
There are plenty of issues that may arise in financing M&A deals. John Willding feels that one common mistake that buyer’s make is failing to budget enough time for securing financing. For some buyers this is a difficult and time-consuming process with EBITDA numbers changing as due diligence is conducted. To avoid this pitfall, sellers should require a “no financing out” covenant from buyers.
Buyout vs. Recapitalization
Sellers should consider whether they want to sell 100% of the company (a “buyout”) or sell less than all (a “recapitalization”) where they cash out on some, but not all, of their equity. John Willding states that strategic operating companies will often prefer a buyout while private equity buyers structure the acquisition as a recapitalization where the seller continues to own or “roll” a percentage of their equity. Sellers should know the pros and cons of each and what buyers will expect.
Representations and Warranties
In some cases, representations and warranties may have been included during negotiations — buyers need to take note of these items before closing on a deal. While many of these representations and warranties may appear to be innocuous, they could become major sticking points if the seller fails to recognize any potential issues early on in the process. John Willding says buyers often want “clean reps” and sellers may be unable to give them, which can impact the price.
One thing sellers should consider at the Letter of Intent stage is Indemnification, which ties to a seller’s breach of representation or warranty. Buyers will typically hold back 10% of the purchase price to satisfy claims for such breaches. John Willding states that sellers should consider purchasing a Representations and Warranties Insurance Policy to have greater peace of mind and reduce the amount held back in escrow.
Joint and Several Liability
When a selling company has multiple equity owners, they should educate themselves on joint and several liability. John Willding states that several and not joint liability can help minority owners avoid outsized liability or indemnification.
When M&A negotiations get to the point where both parties are ready to sign a Letter of Intent, they need to consult with experienced M&A counsel to properly outline the transaction and establish a framework for an expedited closing. With a good framework and experienced counsel, the parties should have a successful closing.
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About John Willding
John Willding is a Mergers & Acquisitions attorney located in Dallas, Texas with 20+ years experience representing buyers (including private equity funds) and sellers in business acquisitions. He has successfully closed over $3 billion of private company middle-market deals in industries such as healthcare, technology, defense, manufacturing, real estate and energy. He is a Graduate of Southern Methodist University, Rutgers, and Harvard University.