You’ve decided to sell your business. Or maybe you’re snatching up a new business—possibly a former competitor. In either case, you face huge challenges. Mergers and acquisitions are disruption level events. They can be profoundly satisfying and enriching. Or they can spell the end of a dream that’s fired you and your team for decades.
To that end, avoid these three surprisingly common M&A mistakes:
Mistake #1: Not Doing Your Due Diligence
The Sun Tzu said it best three thousands years ago: “Know thy self, know thy enemy. A thousand battles, a thousand victories.” Obviously, buying or merging with a business is not exactly like fighting a war. But the general point applies. Before getting inextricably linked up with another company, drill down. Understand what the entity does; what its culture is all about; who runs and it why; and so forth. Likewise, get clear on your own motivations. What personal and professional needs are you trying to meet?
Research the following:
- Financial statements. Review quarterly and monthly statements for the last three years. Have these statements been audited? Are margins expanding or decreasing. What are the company’s liabilities? Are there accounts receivable issues? Will current financial resources cover operating expenses and transaction expenses through the closing date? What are the payroll details, including agreements with tenured employees?
- Technology and intellectual property. What patents pending does the company own? What steps have they taken to protect confidentiality and intellectual property? What copyrighted products and materials will transfer to you after ownership? What will be the technology licensing renewal fees in the near future? Are there any liens or encumbrances against intellectual property?
- Customer base. Understand both the sales process and what percentage of revenue comes from each main client. Analyze relationships to find out if key consumers will continue after the transition.
Mistake #2: Not Having a Purchase Contract
Seek qualified legal advice before completing any transaction. Hire a lawyer to draft sale terms or, if they are already written, to review them before the sale is complete. A lawyer can make sure your merger or acquisition satisfies state and federal laws concerning business transfers. He or she can protect your interests and ensure that the contract clearly:
- Details exactly what assets will be sold.
- Specifies the sales price and date of transfer.
- Provides a time frame and process for due diligence.
- Identifies representations and warranties made by both buyer and seller.
- Protects confidential information.
- States conditions required for closing.
- Clarifies remedies for default on either side.
Mistake #3: Not Negotiating a Non-Compete Agreement
If you are buying a business, you are assuming it will continue to provide the same profits it did before the sale. Without a non-compete, there is nothing to stop the previous owner from opening another business of its kind and drawing the customers you currently count on for revenue. The sale agreement should contain a covenant stating that the previous owner will not compete within a set geographical area for a specific time frame.
Your Next Steps
Whether you are an entrepreneur who has built a business you are ready to sell or an investor ready to add to your portfolio, the attorneys at AEGIS Professional Services are ready to work closely with you toward funding and growing your next venture. Contact us for a consultation.