Mergers and acquisitions are on the up. The global pandemic is almost over (we hope), and many businesses are planning on increasing their reach by merging with other businesses.
The majority of businesses who are planning on merging and acquiring are looking abroad, because lots of people think this is the best way to protect themselves from another global event like this.
But we shouldn’t be jumping to buy businesses unless we have considered the potential consequences. There are legal considerations, and you should be thinking carefully about them, or else you could find yourself with big problems.
With that in mind, here are the most important legal considerations for mergers and acquisitions.
Make sure you have done your due diligence
If you buy another company, you become responsible for the liabilities associated with it, so it is really important you make sure that any claims made by the sellers are correct. If you don’t, you will – as a Director – be answerable to your shareholders.
You need to get proof that the business you are buying actually owns the assets it says it does, like property, equipment, intellectual property, and patents.
You should also ask for details regarding past, current or pending legal cases.
You need to know if there are any current and possible future contractual obligations with employees, customers or suppliers, as it will be your duty to fulfil these.
Finally, you should consider the impact a change in business ownership might have on existing contracts. You might, for example, find there is a conflict of interest somewhere that means you are no longer permitted to carry out work the company had been banking on under original ownership.
Make sure you aren’t overpaying
This is the most common problem that arises in mergers or acquisitions. In order to make sure you are not overpaying, you need to be sure that the information you have been provided about the worth of the company you are buying is correct. A lawyer is the best way to do that.
Remember, sellers will always tell you when you are not paying enough, but they won’t tell you when you are paying too much. Make sure you have someone fighting your corner who is willing to do that, or you might find yourself being grossly overcharged.
Mistakes in paperwork
One thing all mergers and acquisitions have in common is mountains and mountains and mountains of paperwork. Every single detail of the deal needs to be written up in the correct terminology, or you could find yourself buying something you had never intended to purchase.
It is vitally important you don’t try to buy a business without a very good corporate lawyer on your side, or else you will almost certainly overlook something. This is a very complicated situation. Probably the most complicated you will ever face. Don’t go it alone. Trust us, investment in a lawyer is well worth the money. It will reduce your stress level, free up your time to continue with work, and make sure everything is signed, sealed and delivered in the way you had intended.
Equity and cash
You should not neglect to think about how your payments are going to be processed. When you buy a business, you can either pay in cash or in equity.
Cash payments are fairly straightforward, but paying in equity means issuing stockholders of the acquired company equity at a ratio relative to the company’s value. This might reduce the costs of debt financing and improve the debt rating of that company. It might be in your best interest to do it, but it might not be the method preferred by the vendors. A lawyer can help you negotiate this, and make sure it is done properly when the time comes.
Knowing your rights with regards to pulling out
Perhaps the second most common way people lose money when they are trying to buy another company is forging ahead when everything tells them the deal is not right.
There are two reasons this happens.
First, business owners feel guilty and awkward about withdrawing from the deal. The second, they don’t know if they are entitled to or not.
The value of pulling the plug on a deal is extremely overlooked. It is really important that you keep a clear head on this, and consult your lawyer about how you pull out of a deal if it doesn’t feel right anymore. They’ll tell you the best way to go about it.
We can help you
JMR Solicitors have many years of experience helping businesses with M&A deals. Whether you’ve already found a business to buy or you are currently searching the market, we can help.
Please email email@example.com or call 0161 491 3933.