Mergers, Acquisitions and Loan Closings

Whether you have decided to start a new business, acquire an existing one or undertake a real estate development project, I like to remind my clients that they should think of their attorney as much more than a “Closing Attorney.”

Many years of practice have led me to the firm conviction that closings are ideally viewed as a ritual consummation of a business transaction. That’s because the hard work necessary to make a deal happen (and happen right) should have been concluded well beforehand, so that the closing merely a time for the parties to formalize the transaction and to celebrate. Whatever the size of a business transaction, it is always important to the participants and a successful closing is cause for celebration, whether that means a closing dinner, a drink or just a warm handshake.

You’ve spent countless hours investigating business opportunities, and you’ve finally identified one you’re considering buying. What’s next? Even though it’s supposed to be strictly a business decision, the emotional involvement is probably second only to the choice of a life partner. (In fact, at times you or your life partner may wonder which one is commanding the most commitment) 

No matter how emotionally invested you may be, now is the time take a hard look at the business, before you take the plunge. This means conducting Due Diligence. We’re assuming that you have addressed the business side of the equation – business planning, marketing, evaluation of competition, market share, market position, financing, cash flow projections, business location, web site design, and so on. While attorneys may make suggestions or point out pitfalls, it is up to the business person to make the business decisions. As lawyers, our job is to point out the legal issues and to help you address them.

At our initial meeting, our first task is to gain an understanding of your business goals and concerns. Once we understand the nature of your venture and what you are setting out to accomplish, we will work with you to identify the “deal essentials” and potential “deal killers” and to outline the sequence of events.

Depending on whether or not you have consulted with an attorney early on, you may have just reached a tentative verbal agreement, or you may have signed a Letter of Intent or Letter of Understanding, or you may even have signed a formal contract (usually with a title such as Asset Purchase Agreement). Whatever you may have signed, there should be an “escape hatch”, that is, a way to back out of the deal without penalty if you discover a flaw, defect or undisclosed problem. Usually the escape is in the form of a Due Diligence or Inspection Period, during which you investigate the business in greater detail.

In most instances, if you discover a deal-killer during the Due Diligence Period, you can back out of the transaction and even get back any earnest money deposit you may have made. Alternatively, if you discover that things are not quite what they seemed at first blush, you may be able to renegotiate the terms. The important thing is to pay close attention to the deadlines and notice requirements, or you may lose your earnest money deposit and even possibly be sued for damages. 

So what goes into an Asset Purchase Agreement? 

Simple as it seems, the two most important questions are:

What are you buying, and (at least as important) what are you not buying?

In most (though certainly not all) cases involving non-publicly traded companies, the purchaser wants to buy all of the assets of the target company, but not the company itself. Acquiring the company (such as through a stock purchase) could result in the assumption of all the target company’s liabilities as well as its assets. This should be avoided if at all possible. Inherited liabilities don’t just include possible claims known to the seller. Consider, for example, the possibility that after the sale is concluded, a lawsuit is filed against the company you have purchased. The likelihood of such an event may or may not be remote, depending on the nature of the business, but the level of exposure is limitless. The claim could be as simple as failure to pay the printer’s bill for now-useless letterhead or as devastating and expensive to defend as a claim for injuries caused by a defective product or service, or wrongful discharge of an employee, or improper off-site disposal of hazardous waste.

So in all likelihood the answer to the first question (“What am I buying?”) is: certain assets, which may be described in great detail or in general terms, and the answer to the second question (“What am I not buying?”) is: any liabilities not specifically described in the documentation of the transaction.

Assets may include some or all of the following:

  • Goodwill
  • Phone numbers
  • Yellow Pages listings
  • Tradename
  • Inventory
  • Equipment
  • Furnishings
  • Real estate
  • Tenant’s rights under a lease
  • Customer lists
  • Accounts receivable
  • Orders in transit
  • Standing purchase or service orders from customers
  • Customer lists
  • Key employees
  • Supply agreements from vendors (except accounts payable)

Assumed Liabilities a new owner may consider include:

  • Prepaid supply contracts
  • Service agreements with customers
  • Maintenance agreements for the business premises or equipment
  • Remaining lease/sublease term

Other Due Diligence Matters may include the following:

  • Has the seller agreed not to compete?
  • Has the seller agreed not to solicit customers or key employees?
  • Are there any existing obligations to the seller’s employees?
  • Is there a collective bargaining contract with employees?
  • Does any employee have an employment contract?
  • Are there any pension plan obligations?
  • Does the seller have any outstanding sales tax obligations?
  • Is the seller in compliance with local, state and federal laws?
  • Has the buyer been given an opportunity to inspect all financial records?
  • Have the parties identified all security interests in the assets to be purchased?
  • Have the seller’s creditors been given notice of the pending sale?
  • Will any business licenses or permits be required? Are they assignable? How long does it take and what is required to get them?
  • Leased Premises
    • Is the lease assignable or assumable?
    • Will the Landlord consent?
    • Will a new lease be required?
    • Are the lease terms acceptable?
    • Are there option(s) to renew?
    • Is the planned use permitted?
    • What are the lease obligations?
    • What activities are limited or prohibited?
    • Are either the tenant or the landlord in default under any lease terms?
    • Is the lease assignable? How long is the term of the lease?
  • Are there any problems with the building?
  • Is it safe (especially if, e.g., children are entrusted to your care)?
  • Will it need significant maintenance and repair?
  • Who will pay for maintenance and repair, taxes and insurance?
  • Are there any environmental contamination issues?
  • Is the contemplated use permitted under local zoning and business ordinances?
  • Are there ongoing maintenance or supply contracts? Can or should they be terminated or assumed?
  • What insurance is needed? What will it cost?
  • Does the business have unsatisfied customers?
  • Are there vendors you will need to purchase from?

Whether your plans involve purchase and development of real estate, structuring your business entity, borrowing money or attracting investors, similarly extensive Due Diligence considerations must be taken into account.

Don’t let this list intimidate you – that’s why you need the assistance of competent professionals. You need not and should not go it alone. While the business decisions are yours to make, we are here to provide legal advise, to point out risks and to suggest ways of minimizing them.