Preparing Your Closely Held Company for a Merger or Acquisition in 2021

We recently learned that two regional banks, Huntington National Bank and TCF will be combining in 2021. It’s likely just the start of a trend that will carry well into the new year. After all, the fallout from 2020 is still being experienced across all industries, by companies of all sizes. Some suffered from onslaught that 2020 brought, while others found their footing or even thrived. The former may be looking to cash out, while the latter might well see this moment as an opportunity to aquire businesses at a bargain price. The situation as a whole will likely result in acquisition activity among small and large companies alike.

Even when they involve relatively small or family-owned companies, these transactions can be quite complex. It is important to prepare appropriately and document each step along the way. A few things that closely held companies will need to do as they engage in a business combination, whether acquiring or selling, are as follows:

1. Clean up the corporate records books. If your company is the seller, you will want to make sure your corporate records are in order and take a close look at your company’s foundational documents. A comprehensive review of a company’s bylaws or operating agreement often reveals vulnerabilities that are easily addressed, such as unreasonable voting requirements to make changes.

2. Negotiate a Letter of Intent. Many think the fact that a letter of intent does not bind the parties makes it an unnecessary step in a transaction, but that’s not the case. A letter of intent sets out the expectations of parties on essential issues like the price, payment terms, due diligence period, non-solicitation and confidentiality. Agreeing to these terms at the outset helps avoid wasted time if the parties’ expectations are not aligned. If they are, the letter of intent provides an outline for the purchase agreement and the rest of the transaction.
3. Purchase Agreement. This is the agreement obligating the buyer and seller to the the purchase and sale, respectively, of the company’s assets or stock. The purchase agreement will follow the outline of the letter of intent, and include representations and warranties from on the seller on anything from the validity of its patents to the condition of its property. Depending on the industry, additional considerations should include how to prorate costs, accounts/receivables and payables, and allocation of the purchase price. Some of these terms may be memorialized in a contract separate from the purchase agreement.
4. Due Diligence Period. During this period, the buyer is given an opportunity to investigate the business’s cash flow, books, revenue streams, financial projections, liabilities, employee roster, salary, and benefits. The acquiring party really gets an understanding of the business as well as its physical assets and real property. If real property is involved, there should be time for an environmental analysis, survey, and, naturally, title work.
5. Financing. If the transaction will be financed by a traditional lender, or by the seller, additional documentation will be required, including a promissory note, security agreement, and loan agreement. Financing often causes complications in M&A transactions, so if the seller is not financing the deal itself, it should find out at an early stage how the buyer will be closing it.

This article touches on just some aspects of an M&A transaction that can turn out to be complex when dealing with smaller or family-owned companies. Should you be contemplating a move this year and need assistance in the process, please feel free to contact us.