5 key considerations in an M&A deal

Joseph Chiummiento and the Core Lawyers mergers and acquisitions team identifies key concepts when buying or selling a business.

Often times, most business owners are concerned primarily with valuation or the price they will receive for selling their business. Whether it is a sale of assets or a sale of shares, there are distinct legal elements of each transaction that form part of the discussion with your lawyer or accountant.

Any transaction of assets or shares brings up questions regarding valuations, employees and/or material contracts.

The discussion invariably leads to talking points around these five areas:

Valuation

How was the value determined, was it based on a formal valuation by a certified business valuator, was it a multiple of profit (ie. Profit times 3 years), was it a multiple of EBITDA, enterprise value or was it simply a discussion of “what I would pay if I were buying or selling this business”. Understanding what is typical in your industry and how to maximize valuation for you as a buyer or seller are very important.

Lease

The lease of a business is an asset. The longer life left in the lease the bigger the asset as the lease costs are determinable. Many buyers will look at the lease costs as a percentage of sales/revenue to determine or understand a sellers ability or determine credibility in running the business. If the costs are too high further inquires into the financials will and the overall deal could be at risk.

Employment Agreements

If there are no written contracts in place with employees this could significantly increase or decrease the purchase price paid or received. If a seller is forced to terminate employees and pay termination pay or notice that can significantly decrease the price received by the seller. Also, if no contracts exist the buyer will be assuming some risks which will likely lower the purchase price. Retention of key employees will be important to any would be buyer as the employees are a valuable asset.

Condition of Assets

If a would-be-buyer will have to pour additional funds into buying new assets, managing new leasehold improvements or spending money in a significant way this will reduce the purchase price. These types of expenditures have to be accounted for and balanced into the financial picture or measured into the historical financial position to determine potential impact.

Material Contracts

All material contracts should be written. Long term supply agreements, special pricing from Vendors, and anything driving profit or sales into the business should be covered by an agreement in writing. Even simple agreement is better than no agreement, and a letter or email confirming the arrangements can also be used in some situations.

If you are buying a business, selling a business or merging your business with another these top 5 considerations should be discussed with your advisors – legal and accounting before you begin negotiating the price. The cost of such a 1-hour meeting should provide the answers needed to maximize your interests in any transaction. For any questions or further discussions please feel free to contact me directly via email or phone or schedule a meeting at our offices.