Mergers and Acquisitions Transaction FAQs
Mergers and Acquisitions Transaction Advisors & Lawyers
In this week’s newsletter Dragon Argent’s M&A Lawyers sharing quick-fire answers to some of the most common questions we receive from business owners when they begin to plan an exit from their company. Typically, these transactions fall into the category of mergers acquisitions and disposals and for someone exiting a business, specifically sell side M&A. Our Head of Corporate & Commercial Law, Freddie-Nicole Brace provides the answers...
What is the difference between a merger and an acquisition?
A merger is when two or more separate companies combine to form a new mutually beneficial entity in which ownership, control, and profit are shared. Most mergers are driven by commercial strategy to bring together resources and use one company’s strength to bolster the others’ weaknesses and vice versa.
An acquisition is where one company purchases another company or its business. This results in instant growth for the purchasing company and allows the selling company to either exit the business completely or do away with any unwanted parts of the business.
What are the most common types of private M&A transaction?
Share Sales: the buyer purchases all or some of the shares in the company being sold
Asset Sales: the buyer purchases all or part of the business of the selling company in the form of assets and liabilities
Vertical Merger: the combination of two or more companies which sit at different places in the supply chain of the same industry e.g., company A runs an online marketplace platform and company B provides online payment transfers.
There are many ways that an M&A deal can be structured and which to use will depend on what is to be achieved. Dragon Argent is experienced in providing legal advice for startups and SMEs on a multitude of deal structures and our advisory and legal teams work closely together to ensure that we always offer the best solution to our clients.
What is the process?
The process for each type of transaction will differ slightly, however, a standard M&A transaction will likely include the following stages:
Stage 1: Pre-Contract & Negotiation
During this stage the parties will be meeting to discuss the opportunity, obtaining funding and carrying out the due diligence process. Documents commonly required at this stage include an NDA, a non-binding Heads of Terms and due diligence questionnaire
Stage 2: Preparation & Negotiation of the Transaction Agreement
Having put together a Heads of Terms document setting out the main elements of the transaction and after having conducted due diligence, the parties will then negotiate the Transaction Agreement. Much of the negotiation will be around the warranties that the seller is required to give and any provisions that are required to cater for any issues thrown up in the due diligence process.
Documents commonly required at this stage include a transaction agreement, disclosure letter, personal guarantees and corporate ancillaries
Stage 3: Completion & Post-Completion
Once the Transaction Agreement has been agreed and executed the deal will have completed but the work is far from finished! Things that the parties may need to attend to post- completion include:
Filing of documents
Meeting any completion conditions listed in the Transaction Agreement
The actual delivery of any physical assets
Updates and communications to employees/clients/suppliers
Integration of the new business/assets/staff
Payment of any tax due
It is common for buyers/sellers to instruct lawyers at the outset once the Heads of Terms are agreed and prior to the due diligence process. The earlier experts are involved, the better protected your position will be.
Unlike traditional law firms without an advisory function, Dragon Argent’s business advisory team can also provide assistance with initial negotiation of the transaction and those discussions filter through to the legal team so that your commercial aims are always front and centre during the entire process.
What is due diligence & why is it important?
Due diligence is one of the most important parts of the M&A process. Its purpose is to:
Uncover any risks inherent in the deal;
Enable the parties to limit any exposure to those risks;
Verify the nature of the deal; and
Asses the value of the deal.
In practice, it isn’t uncommon for sellers to have gone through their own due diligence process prior to coming up with the sale price as a financial examination of the company and/or its business, will assist in determining the market value. Accurate financial records are extremely important for this purpose.
A buyer may ask to see the seller’s due diligence report but will also want to conduct its own due diligence, done by way of a Due Diligence Questionnaire which will consist of questions about the company and/or the business covering topics such as:
Legal Due Diligence
Legal structure
Contracts
Employment obligations
Financial Due Diligence
Balance Sheet
Profit & Loss Account
Cash Flow Forecast
Revenue Analysis
Commercial Due Diligence
Product-Market Fit
Go-to-Market Strategy
When conducting due diligence, the parties should ensure that they are using appropriate experts who understand the questions being asked and can review responses with a view to picking up on any underlying risks.
How do I get the best price?
Usually, the total price will be arrived at by weighing up the value of any assets against any liabilities being purchased. Depending on what types of items are being offered for sale, a valuer may be used.
The price set at the outset is not always the price that will end up being paid - due diligence plays a vital role for the buyer in determining whether the price offered represents a fair value for the company or items being bought.
To maximize sale price at exit – it is crucial for a business owner to plan at least 18 months out so that an assessment of the company’s enterprise value can be done and a plan put in place to increase as a sale draws nearer.
How can I fund my transaction?
One of the most crucial issues that an M&A transaction will revolve around in terms of process is how the transaction is likely to be funded. Funding may take the form of:
Upfront cash consideration;
Deferred consideration;
Retention of equity;
Debt finance; or
Investment into a special purpose vehicle used to complete the transaction.
Our advisory team and acquisition and disposals solicitors can discuss all the options available with you and assist you in deciding on the most commercially appropriate way to fund the deal.
What other key aspects do I need to consider?
In addition to corporate and commercial issues, parties to an M&A transaction should consider the following:
Budget
How will the transaction be funded?
Is the company/are the assets worth the price at which they are being offered?
If buying, are you confident that working capital is available to make a success of the business?
Intellectual Property
Who currently owns the Intellectual Property?
On what basis is the Intellectual Property to be valued?
Which of the parties will need rights to use the Intellectual Property once the deal has been done?
Tax
What is the most tax efficient structure for the transaction?
What taxes are payable and by whom?
Are tax indemnities required?
Employment law
Will TUPE apply? (If the transaction is an asset transfer as opposed to a share sale then the answer is likely to be yes)
What is plan for employees post transaction?
Have content and timing of communications regarding the deal to employees been considered?
How can Dragon Argent help?
Dragon Argent’s mergers and acquisitions advisors and legal team for startups and SMEs can guide you through the M&A process from beginning to end and beyond!
The synergy between our tax, legal and advisory teams means that we are uniquely positioned to provide comprehensive advice and ongoing support from structuring and negotiation of the deal to integration post transaction. Schedule a call with one of our M&A transaction advisors today to discuss the prospective sale of your business.
Book a call with our M&A Solicitor today ↓
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