1. Execute an Exclusivity Agreement.
The entrepreneur client’s first step in connection with an acquisition ought to be to execute a tightly-drafted exclusivity (or “no-store”) agreement, granting it the extraordinary right for a time period (e.G., ninety days) to barter with the seller/target and to complete its due-diligence research. Such an agreement is often part of the letter of intent (the “LOI”), but, from the consumer’s angle, it can be preferable, as discussed underneath, to execute a separate letter agreement and skip the LOI. Indeed, if the customer executes an exclusivity agreement with the target early on, it can keep away from (i) stepping into a bidding war with another searching for what you offer and (ii) spending enormous time, cash, and assets on due diligence with none assurance that the vendor will not strike an address any other birthday celebration.
2. Avoid Negotiating the Material Terms in an LOI.
Besides recognizing a no-shop provision (discussed above) and a Hart-Scott-Rodino submitting (mentioned underneath), there are typically no sizable blessings to the client in executing an LOI. Indeed, the vendor’s negotiating leverage is most powerful before the execution of an LOI — especially if the goal is represented with the aid of a funding banker who has correctly created aggressive promoting surroundings (or the belief of identical) — and consequently, it’s miles within the dealer’s interest (now not the customer’s) to negotiate the cloth phrases of the deal inside the LOI. The consumer can avoid this trap in one of the ways: (i) via executing an exclusivity letter agreement and skipping the negotiation of an LOI — i.E., proceeding without delay to the negotiation and execution of a definitive acquisition settlement; or (ii) by using executing an LOI that consists of a binding no-shop provision, however, is otherwise non-binding (except possibly with appreciate to price repayment and/or different “special” provisions) and is as non-specific/trendy as feasible (e.G., “this letter summarizes a proposal under which the Buyer would acquire the Target”).
Either approach gives the consumer no longer the best robust negotiating leverage and the time and flexibility to finish its due diligence research before agreeing to any fabric terms. Moreover, it’ll decrease the threat that the LOI could be construed as a binding agreement among the events — the primary purpose why a consumer ought to be circumspect with recognizing to the execution of an LOI — leading to capability damages if the transaction is not consummated. (Note: an LOI does serve a useful motive in deals greater than about $60 million — i.E., it permits the parties to make any required filing beneath the Hart-Scott-Rodino Antitrust Improvements Act of 1976.)
3. Do Your Diligence.
A comprehensive due-diligence investigation is vital to the achievement of any acquisition. The essential purpose of due diligence is to validate assumptions with appreciation to valuation and to discover dangers. Accordingly, there are normally three separate investigations: operational/strategic, monetary, and felony. Clearly, the scope of the investigations need to be tailored to the particular transaction; however, it cannot be emphasized sufficiently that most deals fail because of inadequate diligence — ensuing inside the buyer (i) overpaying for the goal, (ii) assuming considerable unknown liabilities and/or (iii) experiencing foremost integration troubles. As I witnessed first-hand at two predominant New York law firms, the best acquirers spend a brilliant quantity of time in the field (now not in the information room) interviewing clients, providers, competitors, creditors, and, of the path, control if you want to gain a deep understanding of the goal’s value drivers and commercial enterprise risks. They also exhibit tremendous discipline and could stroll away from a deal (regardless of the time and money spent) if they decide that they may be overpaying and/or certain significant dangers cannot be contained. In quick, good enough diligence (coupled with rigorous analysis) is key.
4. Buy Assets, Not Stock (Equity).
It is usually fine for an acquirer of a private organization to purchase assets, not fairness, of the goal for two predominant reasons: (i) it’s going to get a stepped-up tax foundation inside the received property; and (ii) it will decrease the assumption of any undesirable liabilities. Indeed, in a stock transaction or merger, the buyer assumes all the target’s liabilities through the operation of law; in an asset transaction, however, the purchaser most effectively assumes the one’s liabilities which might be expressly agreed to in the acquisition settlement. There are, however, sure liabilities that, irrespective of the asset-purchase structure, could be assumed by way of the customer underneath the doctrine of “successor liability” as a matter of public coverage, the maximum sizeable of which consist of (i) merchandise legal responsibility, (ii) environmental liability, (iii) “bulk income” legal guidelines and (iv) certain employee benefits and labor issues.
Accordingly, the purchaser needs to guard itself in the acquisition agreement towards such liabilities with cautiously drafted indemnification provisions. Furthermore, the purchaser ought to also shield itself in an asset deal towards a fraudulent conveyance claim through the goal’s lenders by requiring that (i) the sale proceeds stay with (or be used for the gain of) the target and now not be allotted to the target’s stockholders and/or (ii) adequate preparations are made to pay-off the target’s lenders. Needless to say, every deal is exclusive and should be established and negotiated with the assistance of equipped recommend, together with tax suggest; but, the buyer entrepreneur has to usually be considering cherry-selecting assets (with the caveats mentioned above).
5. Tailor the Acquisition Agreement to the Particular Transaction.
The customer’s initial draft of the acquisition settlement must be tailor-made to the unique transaction. Indeed, this isn’t the time for the customer’s counsel to apply a few off-the-shelf forms (or “the settlement we used on that other deal”), with new names inserted. Instead, the preliminary draft ought to mirror ongoing substantial discussions amongst individuals of the client’s transaction team concerning threat allocation, buy fee concerns, the diligence findings, and the overall negotiating strategy. The buyer’s counsel ought to, as an instance, especially talk along with his purchaser about how aggressive the initial draft ought to be. Perhaps from the consumer’s point of view, the purchase rate is so correct, and any enormous risks are deemed to be far away (or containable) that the purchaser desires a “dealer-friendly” (or “middle-of-the street”) draft to avoid losing the deal. On the alternative hand, perhaps the target has such a lot of potential troubles. The buyer perceives it is paying a complete buy rate that the settlement must be aggressively drafted, with wide representations and warranties and indemnification obligations of the seller to defend the purchaser. Needless to say, the role the customer’s suggestion plays is essential: he should apprehend the goal’s commercial enterprise and the substantial deal risks as a way to guard the customer and to ensure that the client is making a knowledgeable judgment concerning rate and terms. Deals often take on life in their personal — with emotions and egos worried — and there is not anything extra critical on the purchase-facet than a lawyer who’s watching his client’s back.
6. Escrow a Portion of the Purchase Price.
The consumer can take to defend itself to escrow a part of the acquisition fee (e.G., 15-20%) for a time frame of publish-remaining (e.G., 18-24 months). Indeed, escrows are fairly commonplace (in particular in which there are a couple of dealers) due to the inherent unfairness of requiring the purchaser to sue the vendor(s) to attempt to get a number of its cashback for a problem or legal responsibility is by no means agreed to tackle. Alternatively, the customer can push for a keep-lower back (i.E., a proper to maintain part of the acquisition charge) and/or a proper set-off in offers wherein part of the purchase rate has been deferred (e.G., where the purchaser has issued a promissory be aware to the vendor as a part of the acquisition charge); but, escrows are manifestly extra amenable to sellers (i.E., less arguably) due to the fact the cash is held using an impartial 0.33 party. The client does no longer have the unilateral right to withhold charge. A few crucial points worth noting about escrows: (1) the buyer has to keep away from limiting its recourse solely to the escrow without any carve-outs unless it’s far completely comfy with the scale of the escrow and has otherwise made an informed judgment with appreciate to the great deal dangers and phrases; (2) the antique pooling-accounting requirements of proscribing escrows to 10% of the acquisition fee and 12 months in length are not applicable; and (3) where there are a couple of dealers, the customer must require the dealers to appoint a representative who’s legal to make all selections relative to the escrow (in addition to other major issues).