What are the legal stages of an acquisition?
The founders of a company may desire to remain with the company or detach themselves from it.
But the occurrence of an acquisition is almost inevitable in the long run for most entrepreneurs.
Understanding the process and getting the right help will be critical, and make all the difference in the ultimate outcome.
Remember that mastering the storytelling side and how you are positioning your business is critical when it comes to engaging and speeding up the process. This is done via your acquisition memorandum. This is super important to reach a successful acquisition. For a winning acquisition, memorandum template take a look at the one I recently covered (see it here) or unlock the acquisition memorandum template directly below.
Here is the content that we will cover in this post. Let’s get started.
- 1. What is an Acquisition in Business?
- 2. An Acquisition is an Attractive Option for Entrepreneurs
- 3. Acquisitions Require Thorough Comprehension and Legal Support
- 4. Common Legal Stages of An Acquisition Transaction
- 5. Preliminary Discussions
- 6. Executing Non-Disclosure Agreement
- 7. Add in a Non-Solicitation Agreement
- 8. Letter of Intent or Term Sheet
- 9. Pre-Signing Period – Due Diligence
- 10. Negotiations of Definitive Document
- 11. Completion of Due Diligence
- 12. Disclosure Schedules
- 13. Signing
- 14. Pre-Closing Period
- 15. Closing
- 16. Post-closing
- 17. Conclusion
What is an Acquisition in Business?
Acquisition in business is the process of selling your company to someone else.
The buyer will ultimately take control or acquire the business operations of the company in exchange for funds.
In general, the acquisition is done by larger companies.
They buy smaller companies to expand their clientele and grow their business or acquire cash flow and profitability or technology.
However, there are exceptions. A small company can also acquire a large company without any strict limitations.
Or two equals can merge together to create a more formidable force in the market.
The arrangement of an acquisition can be through a stock purchase or asset purchase or a combination of both.
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An Acquisition is an Attractive Option for Entrepreneurs
There is always the option of going public with your startup.
However, the option of being acquired is sometimes more desirable and simpler for business owners.
Selling your dream venture to someone else may have its emotional downsides, but it sure can be a big payday for the founders.
It is also a path for your company to continue moving forward on a trajectory of growth.
Which may be the best way to realize your initial mission and vision.
Keep in mind that in fundraising or an acquisition, storytelling is everything. In this regard for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
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Acquisitions Require Thorough Comprehension and Legal Support
If you are a first-time entrepreneur, who is in the process of selling your company, the walk down to the altar with someone new may be a little intimidating and overwhelming.
It is very important for the owners of a company to understand, and comply with all the legal requirements.
And considerations of the business acquisition process.
It is critical to ensure a secure transaction and protect your legal interests.
The goal of an acquisition should be able to give you, as an entrepreneur, and all of your stakeholders the maximum positive outcome.
The corporate world is a dynamic space where environments keep on changing and trends keep on shifting.
Mergers and acquisitions may have been around for centuries, but their frequency and popularity may rise and fall from year to year.
The procedures and the structures of the acquisition transaction may vary from region to region.
The reason for an acquisition may also differ between companies and industries.
But one thing that remains the same is the significant attention to detail.
And thorough analysis of the decision before going through the entire process.
Giving significant consideration to the legal aspects of the acquisition process is very critical for every entrepreneur.
Whether you are buying, selling, or merging a business entity, you as the owner should be precise about the timing and final decision.
Any failure of compliance with the law or overlooking transactional details can lead to delayed approvals.
You could incur penalties and even withdrawal from the process.
To avoid such legal and strategic risks, you as a business owner should develop a solid acquisition plan and then move towards the next phases.
Common Legal Stages of An Acquisition Transaction
There are several strategic and legal stages of an acquisition.
As already mentioned, the actual process varies from company to company and depends on the prevailing circumstances.
These are the common stages in the process.
1. Preliminary Discussions
Do you have the experience of executing a business deal of any sort in the past?
Then you must know that every business-related transaction starts with a basic discussion.
As an entrepreneur, you will formally schedule meetings with one or more potential buyers.
Or even begin with casual conversations.
This discussion or meeting may be completely informal.
It will have multiple recurring occurrences and will lead to higher-level negotiations in the future.
In many instances, small business owners are introduced to potentially interested buyers for their company.
They connect with them through bankers, venture capitalists, and other relevant stakeholders.
Or it could have begun as talks about potential collaborations and partnerships.
This is just the preliminary stage of the acquisition process.
And usually does not involve any specific discussion on the topic of the deal structuring or pricing.
2. Executing Non-Disclosure Agreement
Mergers and acquisitions are big affairs. They are rare and critical for both the concerned parties.
When engaging a potential buyer for serious high-level discussions on your company opportunity, you need to share vital company information and data with them.
In many cases, this information and data may be sensitive and require you and the other party to maintain confidentiality.
It is therefore advisable to initiate and execute a non-disclosure agreement with the potential buyer before sharing vital information and documents.
This will protect your company from exposing itself to the risk of disclosing sensitive information to a buyer who can at any time walk away from the deal.
A non-disclosure agreement should be made and executed with the help of professional legal counsel.
3. Add in a Non-Solicitation Agreement
Another useful agreement in this regard can be the non-solicit agreement.
This contract is a legal commitment between the company and its potential acquirer party.
This will ensure that for a certain period of time during, after closing, or foregoing the deal, the buyer will not poach or hire employees or engage clients.
During acquisition discussions, confidential information is shared.
This data might be at risk of being used with malicious intentions to steal a company’s clients or human assets.
This agreement is very useful for small companies that are potentially available for acquisition by large players in the same industry.
4. Letter of Intent or Term Sheet
After the preliminary discussion and review of the business statistics is completed, the prospective buyer is in a better position to decide his stance.
This means that by this time, the buyer is ready to move forward with the acquisition transaction.
At this point, the two parties will now be looking to draft the terms of the acquisition.
This document that describes the terms of acquisition is called the Term Sheet or the Letter of Intent (LOI).
The letter of intent is a non-binding agreement that outlines the important considerations of the transaction.
In general, it should include structural details like purchase price, the earnout structure, escrow and indemnification, and any specific closing conditions.
It should also include clauses about the treatment of the existing employees after the acquisition closing.
Sometimes, the letter of intent comes with a no-shop provision as well.
This means that the company cannot engage in selling discussions with potential buyers other than the existing one.
And, this exclusivity arrangement is valid for a certain time period.
This is also the point where you need to have dedicated legal help for a thorough review of the arrangement.
Once the letter of intent has been signed by both parties, it may become difficult to review the decided terms.
5. Pre-Signing Period – Due Diligence
The pre-signing period of the legal stages of an acquisition comprises different steps and documents.
Negotiations of Definitive Document
This is the stage where the concerned parties including the company, the prospective buyer, and their legal counsel will sit together and negotiate the final terms and conditions of the acquisition.
The terms will be drafted on the definitive document. At this point, the agreed terms in the letter of intent can be re-negotiated as well.
This stage lasts from a few weeks to a couple of months. Though can stretch out much longer
Completion of Due Diligence
This is a very important stage of the acquisition process.
It is when the prospective buyer will carry out the required due diligence by seeking specific documents from the company to be acquired.
These documents may vary from company to company.
But in general, the requirement will include company formation documents and financing details.
Additional paperwork includes existing contracts and agreements, and intellectual property documents.
In the current digitized scenario, these documents may be shared in a virtual cloud setting or a common data room where both parties have access.
For the potential buyer, this is a critical stage.
If the target company has any secrets or hidden issues, they may become apparent from these documents.
Any such adverse discrepancies or problems can negatively affect the price, terms, and conditions, and require additions of special indemnities in the acquisition transaction.
The definitive documents will also include warranties and guarantees that the company in discussion has no existing lawsuits or breaches of contracts.
If any of these representations or warranties is found to be a false claim after the acquisition closure, the potential buyer will be eligible for an indemnity claim.
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Once the definitive documents are complete and the related agreements have been drafted with mutual consent, the signing stage will begin.
The definitive agreement for the acquisition of the company will be signed by the authorized signatories of both parties.
In many cases, the closing of the acquisition transaction may occur instantly.
However, if there are some clauses or requirements that need to be taken care of before the final closure, then the process may be delayed.
This may be the case if you are seeking government approvals of any kind.
7. Pre-Closing Period
The acquisition is not a one-day affair. It requires a lot of processing and allied activities.
Sometimes the concerned parties want to have a period between the final signing and closing.
This is the time that the two parties will use to prepare and deliver any required items.
The primary aim of this lag is to fulfill all the closing conditions of the acquisition agreement.
Some significant activities that can be completed at this time include obtaining third-party consents or governmental approvals.
It may also be useful for getting existing employees to sign new employment contracts.
The duration of this pre-closing period varies from company to company.
And, it’s one of the essential legal stages of an acquisition.
Once all the terms and conditions of the acquisition closing have been fulfilled by both parties, the deal is ready for closure.
This is the point where the exchange of funds will be executed.
It is the completion of the legal transaction.
Once the deal is closed, the buyer is free to integrate, restructure and control all the operations of the acquired business entity.
This process or sequence of steps may vary depending upon the circumstances.
It should be kept in mind that local or state laws have a strong influence on business operations and contractual agreements.
You should look out for the laws and rules of selling your company before you start the process.
Failure to abide by the applicable acquisition laws may derail your process or stop the sale completely.
For this reason, you must take the time to understand the legal stages of an acquisition.
Mergers and acquisitions are an integral part of the business entity lifecycle.
They provide new opportunities for diversification and growth to the company.
However, the process is not that simple. It is cumbersome and time-consuming.
Additionally, it requires you as an entrepreneur to have a thorough knowledge of the subject.
There are several stages that need to be completed before, during, and after the acquisition process.
They require the expert support of a professional competent legal counsel and specialist M&A advisors.
Whether you are just starting the process of due diligence or in the ending phases of negotiations, having qualified help is essential for any business entity.
Having great counsel will also provide you with many other advantages like:
- Enabling you to make effective use of their extensive business and legal knowledge in the process
- Get professional support in negotiating deals for acquisition
- Drafting legal binding and effective documents for the transaction
- Help you in reviewing documents and contractual agreements
- Provide expert litigation assistance if needed
- Protecting yourself from liability
- Maximizing value
- Optimizing the terms
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