If you are a business owner who is interested in selling part of your business, purchasing part or all of another business, or otherwise creating an arrangement to work with another business, you will likely find yourself dealing with the complicated laws surrounding sales, mergers, and acquisitions. While you will likely need a corporate attorney to assist you in the process, there are important fundamentals to understand.
Selling or Purchasing a Business
Of sales, mergers, and acquisitions, the basic selling and buying of a business is the most straightforward process. Much like selling a home or any other large investment, selling a business takes careful consideration of what your ultimate goals are and the creation of a plan that will allow you to reach those goals. Perhaps most importantly, you will need to determine an accurate valuation of your business based on its success over the years and potential for success down the road. Once you have determined the value of your business and are ready to sell, you can begin reaching out to potential buyers. If you are successful, the selling or purchasing of a business typically involves extensive negotiation over terms and conditions. It will result, ultimately, in the preparation of a sales agreement that will govern the terms of the sale. Once you have sold your business, you will need to notify the IRS of this fact and be prepared to deal with the tax consequences of your sale.
Mergers are slightly different than the simple sale of a business. In a merger, two companies combine together to create one new company. In doing so, one of the companies is designated as “surviving,” while the other is designated “non-surviving.” The non-surviving company merges its assets and liabilities, as well as practical elements such as space and employees, into the surviving company. At the same time, shareholders who own shares in the non-surviving company will have their shares converted to surviving company shares. This is different from the sale of a business, where shareholders would receive their portion of the profits from the sale but no longer have ownership interest in an entity. Since the non-surviving company is putting its assets and value at the behest of the surviving company, mergers require very careful due diligence in order to ensure that one company does not have any challenges or financial difficulties that are driving the merger and will eventually hurt the other company.
Acquisitions are a special process whereby one company “buys” another company, through acquisition of its assets, but with the intent to keep both businesses running in some capacity. For this reason, it is also known as a takeover. Acquisitions can take two forms. In more traditional asset acquisitions, the purchaser will typically gain control of the assets and operations of the company, but will not purchase the stock of the company from shareholders. Thus, the management and operation of the company will change, but the ownership will remain somewhat similar. Conversely, in a share acquisition, the purchasing company purchases all of the shares of the company as well as its assets and liabilities. This makes the purchased company a “subsidiary” of the purchaser. While mergers are generally amicable business transactions that result in the combining of two business enterprises, acquisitions can be more hostile in nature and may involve the displacement of employees, owners, or other assets. This is known as a “hostile takeover.”