M+A: Mergers and acquisitions in the mid-market – information for sellers

Riordans Lawyers have been acting for buyers and sellers in mid-market acquisitions for many years. Set out below are some helpful tips and thinking points for intending sellers.

Don’t sign anything until you get advice

This may be stating the obvious, but it needs to be said.

Depending on its terms, a simple one-page “Terms Sheet” or similar document can be a legally-binding agreement.

If so, signing such a document on a multi-million dollar deal without advice can open a portal to a place of litigation and pain.

Get advice early

Don’t slip unprepared into a sale of shares or assets.

Having made the decision to consider selling, the Board of the Seller should be prepared to commit funds to the project and to obtain immediate expert advice on what will be required.

The costs of a deal falling through or being less than satisfactory in outcome will far outweigh the costs of obtaining good legal and accounting advice from the outset.

Establish  a team

The input of the legal, accounting and other advisers (e.g. valuers) into the processes of due diligence, price calculation, contract negotiation and deal completion are all essential components in the acquisition process.

Those advisers each have their own role to play in each of those processes.  Those roles should be complimentary with each other and with you as the client/seller.

A Seller needs to be satisfied from the outset that the firms which it has chosen can work effectively and co-operatively with its personnel and with each other as a team throughout the entire process.

Preliminary planning

Before initiating or responding to an offer, some pre-planning is necessary.

An understanding of what the Buyer sees as attractive in the business will be helpful. Your advisers can assist in identifying what the Buyer may be looking for.

For example, the premises may be important to the Buyer and the offer may come at a time when aspects of the lease can be negotiated to the Seller’s advantage.

It may be prudent to settle any potential disputes with important suppliers and to bed down employment contracts with important employees.

Similarly, if intellectual property is likely to be important, registration of some rights may be required and assignments of intellectual property in favour of the Seller obtained from those staff whose services are provided as contractors to the business.

Be clear as to what is being sold

An important consideration at the outset may be whether to sell the business (essentially, the goodwill and assets) or, alternatively, whether to sell the shares in the company which owns the business.

If shares are sold, it is necessarily a more complex deal. This is because there are effectively two sales involved – Buyer is acquiring not only the business, but also the entity which conducts that business. (see “Mergers and Acquisitions in the Mid-Market – Information for Buyers”)

From the Seller’s perspective, there may be tax or other advantages in selling off the entity as a whole, rather than discrete assets.

For example, if the company sells the business and makes a capital gain, the proceeds of that capital gain flow down to the shareholders as dividends and are taxed in their hands as income. However, if the shares in the company were sold, the individual shareholders would make capital gains which may qualify for the 50% capital gains tax discount concession.

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