Market knowledge, experience, and the ability to do successful research is all important to a successful business acquisition strategy. A business acquisition strategy combines a set of deal terms with the following key objectives:
Providing the seller with remuneration for the business
Ensuring that the buyers can operate the business in line with their goals
While business purchase price is usually the most well known factor of a purchase agreement, no sound business acquisition is made on price alone. There are a number of important terms that must be agreed upon and a number of financial requirements that affect the viability of the acquisition structure.
First, let’s look at the growth in mergers and acquisitions.
How Popular are Business Mergers and Acquisitions?
According to the Institute of Mergers, Acquisitions and Alliances (IMAA), the popularity of mergers and acquisitions has mostly risen since 1985.
The following is a chart indicating the number of announced mergers and acquisitions worldwide since 1985.
The following indicates the growth in the number of announced mergers and acquisitions in North America.
Let’s take a look at the types of acquisition agreements you might consider when buying or selling a business.
Entity Purchase versus Asset Purchase
When your business is acquired, there are essentially two types of purchases, which are briefly explained here:
Entity Purchase – also known as a stock purchase agreement, involves the buyer purchasing the business entity by buying a majority ot the company’s stock. The new owner then steps into the position of the previous owner and assumes the company’s debts and obligations.
Asset Purchase – in this type of agreement, the buyer purchases only the business’ assets, its tangible property (real estate, equipment, inventory, etc.) and its intangible property (copyrights, patents, trademarks, etc.). The company’s structure remains in place with the original owners but there is no business left in it.
When choosing which business acquisition model best applies to your scenario, you have to start by examining the taxes and liabilities for your business’ obligations.
Which is the Right Acquisition Model for Your Business?
From the tax angle, the asset sale is often better for the buyer because they can begin depreciating the assets quicker (and save on taxes). A seller often prefers the entity purchase model because the seller pays taxes at the lower long-term capital gains rate. Sellers are wary of using the asset model for a C corporation due to the risk for double taxation.
From a debts and liabilities angle, an asset purchase model is often preferable to the buyer because they aren’t responsible for any existing debts. In an entity sale, it’s assumed that the buyer takes on all liabilities of the business after the sale although in some cases, selling members may accept some responsibility for liabilities to make the sale happen.
Top 8 Deal Terms that Make a Successful Business Acquisition Agreement
The following deal terms are outside the business’ sale price and comprise the standard terms that must be agreed to in a successful business acquisition agreement:
The buyer down payment to the seller – it’s common in acquisition agreements for the buyer to structure the payments and make a down payment of 20-25% typically.
The buyer and bank financing – this section outlines the buyer’s bank financing terms that will support the purchase agreement.
The business’ ability to pay the new owners (and sometimes the old owners) a salary.
The payback period terms – this refers to the agreement to pay the balance to the seller over a period of a number of years in regular installments.
The capital expenses needed to keep the business running – this section of the acquisition agreement outlines the capital expenses the buyer should be aware of in order to keep the business running over the next year (usually described in monthly quarters).
The working capital needed by the buyer beyond the purchase price – this section outlines the working capital that the buyer will need to continue to pay employees, purchase inventory, cover the lease and utility bills, etc. These are the monthly bills the business currently pays every month.
The business’ current cash flow and debts – this section outlines the business’ current cash flow, where it comes from, and its debts including interest payments on any current loans.
The cost of the business’ licenses, permits, expenses, and closing costs – this section outlines the purchase of the business’ current permits and licenses, including the closing costs the buyer will pay at the close of the acquisition.
Essentially, the buyers want to know that the business’ cash flow is sufficient to cover all of the above so that there is the least possible amount of risk.
Getting Help with Your Acquisition Agreement
Here is a disturbing statistic to consider – four out of five small businesses never sell. Why? Because the parties involved cannot agree on the terms. When you’re thinking about an acquisition agreement – buying or selling – things can get pretty complicated pretty quick. Involving an experienced mergers and acquisition attorney is critical whether you are on the buying or selling side – find an experienced attorney by legal area and location.
While the terms laid out here seem simple, the acquisition structure can actually be pretty creative (read, complicated) and involve a great number of moving bits, each of which can switch and change on a daily basis. Most merger and acquisition lawyers agree that the more complicated the deal, the less likely it will go through.