Issues to Consider in Mergers or Acquisitions of a Business

When a business owner is considering consolidation, merger, sale or purchase, collectively, an acquisition or a disposition, there are several very important issues which should be addressed. These issues may occur at any stage, and if not addressed carefully could potentially have large repercussions for the acquirer or disposer.

Need for Expert Advice

Since the issues are complicated and time consuming, the need for expert advice is critical. The initial experts needed are the accountant and lawyer of the business owners considering acquisition or disposition. These professionals are needed to prepare basic financial information and legal advice as to form and tax consequences. Retaining an independent business appraiser is also an important early step for the parties in an acquisition or disposition. Experience indicates that owners of businesses seeking to be acquired tend toward subjectively high valuations while potential acquirers tend toward subjectively low valuations.

Usually, an acquisition or transfer of a business has ramifications personally for the owner. Review by the owner’s personal accountant and lawyer of the work of the appraiser as well as the lawyer and accountant of the business from the point of view of the owner as an individual is recommended. It is preferable that the lawyer and accountant be independent from the lawyer and accountant for the businesses involved in the transaction.

Other Issues

An acquisition or disposition of a business is an expensive transaction for both parties. Because of the probability of initial subjective values by parties to a transaction, it is, therefore, crucial to know exactly what a business is worth in the open market in order to see if it is worthwhile to complete the transaction and incur the expense.

Accurate audits of current financial activities of a business will form the basis of an appraisal and are an important part of the due diligence which each party performs. The substance of the audit will also provide the owners of an acquirer or acquired business with a basis to warrant correct information. In addition to current financial information, the independent accountant of a party to an acquisition or disposition should also be asked to provide a description of the financial situation after the proposed transaction.

Parties to an acquisition or disposition need to know as much as possible about the other party’s business. Such a need requires what is called due diligence in scrutinizing the business of the other party. There will usually be warranties concerning the veracity of statements made concerning the businesses in the acquisition or disposition documents. However, it is always better to know of problems in advance and correct them or adjust the transaction to address them before settlement rather than during litigation for misrepresentation or breach of warranty.

Forming the transaction to minimize adverse tax consequences is also important. An acquisition or disposition is a taxable transaction for federal or state purposes unless it can be done as a reorganization which is generally not deemed a taxable transaction under those laws. Because of the interest in limiting the legal liability of owners, a business is usually a corporation, or a partnership or a hybrid of either. It follows that the acquisition or disposal must be done in accordance with provisions of the state business law to be effective as a continuing limited liability shield against personal injury or contract liability.

The issues described in this article may not always be immediately apparent. Consideration must also be given to strategies to amend the acquisition or disposition arrangements during the course of the transaction. Further, the parties should address how to terminate the transaction completely in the event an unanticipated issue arises that is so serious the transaction should not be consummated.

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