The decision to buy or sell a business is a huge moment. For a seller, it represents the culmination of years, or even decades, of hard work and dedication. For a buyer, it is a massive investment and the beginning of a new chapter. The stakes can not be higher. This process often brings excitement but carries great stress and a long list of potential legal pitfalls. One wrong step can have serious financial consequences that last for years.
This process is not something you should go through alone. The right legal protection is the key to a successful transaction and your future peace of mind. This article will explain the steps involved in a merger or acquisition and show how a skilled attorney can help protect you and your business every step of the way.
What Is a Merger or Acquisition?
Though people often use the terms together, mergers and acquisitions differ slightly. It is helpful to know what each term means.
- An acquisition occurs when one company buys another. The acquired company may be absorbed into the buyer’s company or continue to operate as a separate business owned by the buyer. This is the most common type of transaction for small and medium-sized businesses.
- A merger occurs when two companies, often of similar size, agree to merge to form a new company. The old company dissolves, and a new one takes its place.
This article will discuss "M&A" as the general process of buying or selling a business. The legal protections you need are similar in both situations. The "buyer" is the person or company purchasing the business, and the "seller" is the person or company selling it.
The Key Stages of an M&A Deal Where a Lawyer is Vital
Buying or selling a business is not a single event. It is a process with several distinct stages. An experienced mergers and acquisitions lawyer plays an important part in each stage to protect your interests. Their guidance helps you avoid pitfalls and navigate complexities from start to finish.
The Letter of Intent (LOI)
Once a buyer and seller agree on a deal, the first formal step is creating a Letter of Intent (LOI). The LOI is a document that outlines the basic terms of the proposed transaction—think of it as a roadmap for the deal. It outlines the proposed purchase price, payment terms, and the assets or interests bought and sold.
While most LOIs are non-binding, meaning they are not enforceable contracts for selling the business, some parts are legally binding. These often include:
- Confidentiality: A promise that the buyer will keep all business information they learn during the process secret.
- Exclusivity or "No-Shop" Clause: The seller promises not to sell the business to anyone else during a specific period while the current deal is underway.
The lawyer’s role: An attorney’s help is very important at this early stage. Your lawyer will draft or review the LOI to ensure the binding parts protect you and that the non-binding parts give you the necessary flexibility. A poorly worded LOI can create unintended legal obligations or put you at a disadvantage before the real negotiations even begin.
Due Diligence
Due diligence is one of the most important phases of any M&A deal. This is the buyer’s chance to investigate the seller’s business to ensure everything is as it seems. The buyer and their team of advisors will ask for and review a lot of information about the company.
The lawyer’s role: Your attorney will lead the legal side of the due diligence process. This is a deep investigation to uncover any hidden risks or liabilities. A due diligence attorney will review:
- Company Formation Documents: To ensure the business is legally formed and is in good standing with the state.
- Contracts: They will read all major contracts with customers, suppliers, and employees to look for any red flags or unfavorable terms.
- Financial Records and Debts: They will look for undisclosed debts, liens, or liabilities.
- Lawsuits and Legal Compliance: They will check for pending or threatened lawsuits and ensure the company follows all applicable laws and regulations.
- Intellectual Property: They will ensure the company owns important assets like trademarks, patents, and copyrights.
For sellers, a lawyer organizes your documents and prepares you for the due diligence process. Being prepared can make the deal go much more smoothly. The U.S. Small Business Administration (SBA) offers helpful information on selling a business and always points to the importance of this investigation phase.
The Purchase Agreement
After completing due diligence and once the buyer is ready to proceed, the lawyers for both sides negotiate and draft the final purchase agreement. This main, legally binding contract contains all the transaction details, terms, and conditions. This document can often be over a hundred pages long.
The lawyer’s role: This is where a skilled M&A lawyer provides immense value. Your attorney will:
- Negotiate Key Terms: They will fight for you on all the important points, including the final price, what happens if something goes wrong after the sale, and who is responsible for what liabilities. if a dispute arises, a business contract litigation attorney ensures your rights are enforced through proper legal channels.
- Draft Clear and Protective Language: They will write the contract clearly, which protects you from future risks. The agreement must follow all legal requirements for such a transaction. Many states establish laws outlining the general requirements for a corporate merger to ensure the deal follows proper legal procedures.
Closing
The closing is the final step in making the deal official. The parties sign all final documents, pay the purchase price, and legally transfer business ownership from the seller to the buyer. This step also involves verifying that all contractual conditions are met and ensuring a smooth transition of control and responsibilities.
The lawyer’s role: Your attorney will manage the closing process. They prepare a closing checklist, verify that all documents are properly signed, and confirm that all legal requirements are satisfied to ensure a smooth ownership transfer.
Common Legal Risks in a Business Sale or Purchase
An M&A deal carries potential legal risks for both the buyer and the seller. A qualified legal professional's main job is to identify these risks and protect you from them. They work proactively to address issues before they become problems, ensuring the deal proceeds smoothly and safeguarding your interests throughout the transaction.
Hidden Debts and Lawsuits
For a buyer, the greatest concern is uncovering massive undisclosed debts or a serious lawsuit after finalizing the deal. State laws are very clear that when one company merges with another, the new company is generally responsible for all the debts and obligations of the old one. The law ensures a business cannot avoid its responsibilities through a merger. There are specific state laws that outline the legal effects of a merger. An attorney’s thorough due diligence is your best protection against these kinds of damaging surprises.
Employee and Contract Issues
A business is not just its assets but also its people and relationships. A buyer needs to know if key employees have employment contracts or if there are any ongoing employee disputes. They must also determine whether the company's key customer contracts can transfer to a new owner. An attorney will review all of these agreements to make sure the transition will be smooth. This thorough review helps prevent unexpected disruptions affecting the business’s value or operations after the sale.
Intellectual Property Problems
A company’s brand name, customer lists, and inventions are some of its most valuable assets. During due diligence, a lawyer will verify that the seller owns this intellectual property and is properly protected. Buying a business only to find out it does not have the rights to its name can be a disaster. Underestimating these integration issues is a common mistake in M&A deals.
Unfavorable Tax Consequences
How a deal is structured greatly impacts the taxes the buyer and seller must pay. A good business law attorney will work with an accountant to structure the transaction in the most tax-efficient way possible, potentially saving you a lot of money. This collaborative approach ensures your deal aligns with legal and financial goals for maximum benefit.
How a Skilled M&A Attorney Makes a Difference
Thinking of a lawyer as another cost in a business deal is a mistake. A good mergers and acquisitions lawyer is an investment that can save you from financial disaster and provide peace of mind.
The main value a M&A attorney brings is risk reduction. They know how to spot issues that a business owner might overlook. By identifying risks early, they can be addressed in the purchase agreement or even lead to a decision to walk away from a bad deal.
An attorney also adds value by negotiating better terms. They can often negotiate a more favorable purchase price, better payment terms, or contract clauses that limit your future liability. A single well-negotiated clause can be worth many times the cost of the legal fees. The U.S. Securities and Exchange Commission (SEC) oversees the largest public company mergers and has many rules showing how detailed these agreements can be. The SEC's information on mergers and acquisitions gives a sense of the level of detail a skilled lawyer manages.
Finally, an attorney ensures the deal is done right. The law has many technical requirements for properly transferring ownership of a business. A lawyer enforces all these rules to ensure your sale or purchase stands on solid legal ground.
First Steps to Take When Considering a Business Sale or Purchase
If you have decided to explore buying or selling a business, you should take a few steps immediately to start the process on the right foot.
- Get Your Team Together Early: Do not wait until you have a deal on the table to find your advisors. The first step is to find an experienced business law attorney and a good accountant. They should be involved from the very beginning to set a strategy.
- Organize Your Business Records: If you are a seller, get your financial and legal documents in order. The more organized you are, the easier the due diligence process will be for a potential buyer. This can make your business more attractive and lead to faster sales.
- Understand Your Goals: Know what you want to achieve with the transaction. Are you looking for the highest possible price? Do you want to make sure your employees are taken care of? Knowing your priorities will help your lawyer negotiate a deal that meets your needs.
- Protect Your Confidentiality: Before sharing sensitive information about your business with a potential buyer, you must have them sign a non-disclosure agreement (NDA). Your attorney can draft a strong NDA that protects your company’s secrets. Some state laws have specific rules about fraudulent actions in business deals, and an NDA is a first line of defense.
- Be Careful with Non-Compete Agreements: If you sell your business, the buyer will almost certainly ask you to sign a non-compete agreement. This will restrict your ability to start a similar business in the future. These agreements must be reasonable to be enforceable under the law. Having an attorney review any laws regarding non-compete agreements and negotiate the terms to ensure they are fair to you is very important.
A Lawyer Is Your Best Protection When Buying or Selling a Business
Buying or selling a business is one of your life's most significant financial events. While this time brings excitement, it also presents legal challenges and potential risks. Trying to handle such a high-stakes transaction alone can lead to costly mistakes that can haunt you for years.
Working with a General Business Law Counsel from the beginning is the best way to protect yourself, your business, and your future. An experienced business law attorney, experienced in mergers and acquisitions, guides you through the process, helps you avoid mistakes, and fights to secure the best possible outcome. If you are considering buying or selling a business, contact a mergers and acquisitions lawyer to discuss your situation. Early legal involvement can make all the difference in achieving a successful transaction.