Merger and Acquisition Contract: Everything You Need to Know
A merger and acquisition contract is the paperwork that outlines and governs the merger of two companies.3 min read
2. Negotiating an Acquisition
3. Drafting the Purchase Agreement
Mergers and Acquisitions
When a merger takes place, two things happen. First, the two companies combine their assets and liabilities. Second, it can impact everyone involved with the companies from shareholders and managers to employees and customers. Making the decision to merge may or may not be the right move for your business. Deciding which way to go depends on many factors, such as whether the company's core values remain and should be supported and whether the merger is a strategic fit.
When the acquisition agreement is created, it consists of several documents that are necessary to finalize the transfer of the business, including the purchase agreement. If your company is acquiring another business, it's important to have an attorney draft a comprehensive and legally binding document to protect your interests.
Negotiating an Acquisition
There are several things to consider when negotiating an acquisition since merging or purchasing another company is a complicated business that requires the experience of a business attorney. If you choose not to hire an attorney for the entire acquisition process, at the very minimum, hire an attorney to review any documents that you draft. An attorney takes care of the process from start to finish by negotiating the terms of the deal, drafting all legal documents, which includes the purchase agreement, and finalizing the deal.
Making contact with the owner of the business you're considering buying is the first step when pursuing a merger. After making contact, you'll know whether the owner is interested in selling. There are several ways a buyer can approach a potential business targeted or acquisition. These include reaching out to the owner and requesting a meeting to discuss opportunities.
A joint venture is another option where the potential buyer enters into an agreement with the owner to have a closer look at the business before purchasing. A potential buyer can also use a third-party to contact business owners to find out if they are interested in selling.
When a company is interested in selling the business, having a non-disclosure agreement (NDA) is recommended. An NDA establishes the parameters for confidentiality, allowing a potential seller to turn over business documents to a buyer knowing the buyer would be required to keep them confidential.
Drafting a letter of intent creates a non-binding agreement. The letter outlines the intent between both parties entering into an agreement, establishes a purchase price, and clarifies the exchange of information. It may also include a timeframe in which the seller is restricted from attempting to make the business available to other buyers or sell it to another person or company.
Conducting due diligence means the buyer is going to do a thorough examination of the potential purchase, which will include the potential the business has to grow and the business's assets and liabilities. Some of the areas to examine include:
- The reasons the company is being sold and if there were any previous attempts to sell it.
- Determining how difficult it would be to take over the business.
- The organizational structure.
- Employees and their compensation and benefits.
- Any lawsuits including those involving employees and suits outside of the company.
- Financial records.
- Business assets.
- Major contracts and leases to identify any potential problems.
Drafting the Purchase Agreement
Choose an acquisition model, which shows the intent of how the buyer will purchase the company. Use one of the two forms of acquisition: an asset or an entity purchase. An entity purchase means the majority of the stock is being purchased and all obligations and debts of the company are assumed by the new owner.
With an asset purchase, the buyer purchases all assets, including its real property such as office equipment and real estate as well as the company's intellectual property, which includes patents, trademarks, and copyrights. The new buyer of an asset purchase is allowed to begin depreciating the newly acquired assets immediately, which provides a tax benefit.
An advantage to the buyer of an asset sale is that they are not responsible for the debts and obligations of the acquired business since only the business's assets were purchased. Sellers prefer entity purchases because of having to pay taxes at the long-term capital gain rate. If a C corporation is sold as an asset sale, for example, sellers are at risk of double taxation, which includes one for the shareholders and one for the corporation.
If you need help with a merger and acquisition contract, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.