Mistakes Companies Make in Mergers and Acquisitions and How to Avoid Them
Mergers and acquisitions in every industry is a fact of life. In 2015, 3.8 trillion was spent in mergers and acquisitions, surpassing the previous record of 1.3 trillion in 2007. Reasons businesses merge or acquire with another business may include expansion in a region or market, access to a customer base, to eliminate a competitor or to leverage economies of scale.
In essence, the intent is to grow and be profitable– though profitability does not always end up being the end result. In this blog, we address common critical mistakes businesses make during mergers and acquisitions and guidance to help the transaction go smoother.
3 Common Mistakes Companies Make in Mergers and Acquisitions and How to Avoid Them.
Mistake #1: Lack of Due Diligence
Before you buy a business, you need to know the big picture of what you’re getting into. For example, you need to know what is owned, borrowed, leased and owed. As simple as this concept is, it’s a major contributor to failed mergers and acquisitions. Just because a business appears to be successful, does not mean that it’s without problems. To diligently perform a due diligence, we recommend learning about the business and financial big picture through the following:
- Organization and good standing
- Financial information: Including current balance sheets, profit and loss statements (past 5 years'), tax returns, audited financial statements, list of assets, accounts payable and receivable, debt schedule (as applicable), and more.
- Contingent Liabilities
- Executive summary
- Physical assets and real estate
- Intellectual property
- Employee and employee benefits: Including nondisclosure, non-solicitation or noncompetition agreements between the Company and any of its employees.
- Payroll details, including tenure
- Licenses and permits
- Environmental issues
- Material contracts
- Customer information
- Insurance coverage
- Articles and publicity
Mergers, acquisitions, and other high-value business deals all call for due diligence upfront. That complex work is best performed under the guidance of a proven business lawyer. If you are considering or planning any type of acquisition, merger, or major asset purchase or sale, we invite you to call our business law firm, Hendershot, Cowart & Hisey, P.C.. Managing Shareholder - Simon ("Trey") Hendershot, personally has over 25 years of experience representing buyers, sellers, investors and shareholders in their business merger, acquisition or sale and leads our award-winning business litigation team.
Mistake #2: Not Having a Favorable Sale Agreement or Purchase Contract.
If you do not have a lawyer to help you draft the terms of the sale, you should at least have one review the agreement before you sign it. Why? From real estate, to assets, intellectual property, indemnity, trademarks, and outstanding liabilities & litigation, you need to define in the contract who is responsible in each area and exactly when and how the responsibility shifts from the seller to you as the buyer.
At the very least, the purchase and sale agreement will clearly identify the following:
- Parties and the business to be sold
- State whether the sale is a transfer of a company as an entity or of assets only, and then list those assets;
- Specify the sales price and how it will be paid;
- Provide for earnest money;
- Include an inspection period for the buyer’s due diligence;
- Contain representations and warranties by both seller and buyer;
- Provide protections for confidential information such as trade secrets and a confidentiality agreement;
- Specify conditions precedent that must be met for the transaction to close;
- Provide remedies in the event either party defaults.
Accompanying the purchase and sale agreement should include various attachments such as deeds, an inventory of personal property, a list of liabilities, a copy of the office lease, copies of employee agreements and more.
Mistake #3: Not Establishing a Seller Non-Compete Agreement.
Hurray – the transaction closes! But wait a minute, what’s going to stop the seller from setting up shop around the corner and continue the same line of work? A non-compete agreement prevents an employee or in this reference, the seller, from starting a competing business for a certain period of time after the transaction closes. If established correctly, the purchase and sale agreement should contain a covenant by the seller not to compete with the buyer that is reasonable in duration and in geographical scope. What do we mean by reasonable and geographical scope? In the Houston area, for example, there are three large counties (Harris, Fort Bend, and Montgomery) that fight for the metropolitan area’s business. Therefore, a substantial non-compete agreement would include these three counties.
Why Choose Us for Your Merger and Acquisition? Houston Mergers & Acquisitions Attorneys.
At Hendershot, Cowart & Hisey, P.C., we have helped our clients’ complete mergers and acquisitions, establish joint ventures, and complete other high-stakes transactions for more than 25 years. Our clients have closed purchases and sales of businesses ranging from hospitals, surgery centers, and medical and dental practices to software companies, oil and gas ventures, manufacturers, distributors, and wineries.
We build lasting client relationships by successfully addressing vital concerns such as:
- Protection from fraud, failures in disclosure, and events that may affect a transaction's value/success
- The need for legal advice based on current knowledge of the Texas Business Organizations Code, Texas Business and Commercial Code, other applicable laws, tax considerations, and more
- The need for full-service counsel and representation in matters such as:
- Regulatory compliance
- Protection of trade secrets
- Commercial real estate purchases
- Business formation or corporate restructuring
- Partnership dissolution and indemnification agreements
To speak with one of our experienced business attorneys call (713) 909-7323 to schedule a consultation or contact us online 24/7.