Mergers and Acquisitions From a to Z
Mergers and Acquisitions From a to Z

Mergers and Acquisitions From a to Z

Table of Contents

The wave of M&A activity seen from 2004 to 2007 was driven by the more general macroeconomic recovery and several key trends. First, many companies had exhausted cost cutting and operational efficiencies as a means of increasing profitability and were looking to top-line growth as a primary enabler of shareholder return. The increased pressure to grow turned the spotlight on the opportunity to achieve growth through acquisition. (Location 146)

Note: Buy growth

Second, the M&A market had been supported by the return of corporate profits and, with them, improved stock price valuation. The improved valuations enabled corporations to leverage their internal currencies to acquire target companies that were willing to swap their illiquid private stock for valuable public-company shares. (Location 149)

Tags: public companies, ma, mergers

Note: Leverage to buy companies

Third, interest rates were hovering at historical lows, enabling firms to cost-effectively utilize debt to finance acquisition-based growth. (Location 151)

the strategic reasons for considering such transactions are also numerous, from achieving economies of scale, to mitigating cash flow risk via diversification, to satisfying shareholders’ hunger for steady growth and dividends. (Location 165)

Companies in the small- to middle-market segment need to understand the key drivers of valuation, since they are often able to focus their operating goals in order to maximize the potential valuation range. Therefore, it is important to know that the multiple a company achieves for its business is directly correlated with the following seven characteristics: (Location 274)

Strong revenue growth 2.Significant market share or a strong niche position 3.A market with barriers to entry by competitors 4.A strong management team 5.Strong, stable cash flow 6.No significant concentration in customers, products, suppliers, or geographic markets 7.Low risk of technological obsolescence or product substitution (Location 277)

Tags: ma

Note: .ma

Successful mergers and acquisitions are neither an art nor a science, but a process. In fact, regression analysis demonstrates that the number one determinant of deal multiples is the growth rate of the business. The higher the growth rate, the higher the multiple of cash flow that the business is worth. (Location 283)

Tags: ma

Note: .ma

The Basics of Mergers and Acquisitions

The typical strategic growth options are as follows: organic, inorganic, or by external means. Examples of organic growth are hiring additional salespeople, developing new products, and expanding geographically. The best example of inorganic growth is an acquisition of another firm, something that is often done to gain access to a new product line, customer segment, or geography. Finally, external revenue growth opportunities include franchising, licensing, joint ventures, strategic alliances, and the appointment of overseas distributors, which are available to growing companies as an alternative to mergers and acquisitions as a growth engine. (Location 309)

Tags: ma

Note: .ma companies frequently buy other companies too get access to a new product line, new customers, or a new geography

What variables should a growing company consider in striking the right balance between organic growth (build) and mergers and acquisitions (buy)? These include: The competitiveness, fragmentation, and pace of your marketplace and your industry Your access to and cost of capital The specific capabilities of your management and advisory teams The strength and growth potential of your current core competencies The volatility and loyalty of your distribution channels and customer base The degree to which speed to market and scale are critical in your business (including typical customer acquisition costs and time frames) The degree to which your company operates in a regulated industry (Location 322)

An acquisition typically has one company, the buyer, that purchases the assets or shares of another, the seller, with the form of payment being cash, the securities of the buyer, or other assets that are of value to the seller. (Location 344)

transaction. A merger typically refers to two companies joining together (usually through the exchange of shares) as peers to become one. (Location 344)

wisdom is that, in such an environment, buyers are likely to turn to stock-for-stock deals, as this minimizes their cash outlays. But these deals are difficult to pull off because a corporate sale often triggers covenants in the seller’s credit agreements, forcing debt repayment. Under normal circumstances, the buyer would refinance the debt. That has become a tough task, with the high-yield debt and investment-grade markets largely shut to new issues. (Location 398)

Mergers are the most effective and efficient way to:

- enter a new market

- add a new product line

- increase distribution reach (Location 407)

Tags: mergers

Note: .mergers

In many cases, mergers and acquisitions are being driven by a key trend within a given industry, such as: •Rapidly changing technology, which is driving many of the deals in high technology •Fierce competition, which is driving many of the deals in the telecommunications and banking industries •Changing consumer preferences, which is driving many of the deals in the food and beverage industry •The pressure to control costs, which is driving many of the deals in the health-care industry •A reduction in demand, such as the shrinking federal defense budget, which is driving the consolidation in the aerospace and defense contractor industries (Location 414)

Tags: ma

Note: .ma

Some transactions are motivated by the need to transform a firm’s corporate identity or even to be transformative for the buyer overall, where the target company may lead the buyer in a new direction or add significant new capability. (Location 422)

Tags: ma

Note: .ma buyer hopes sellers company will.change their corporate identity

The global village has forced many companies to explore mergers and acquisitions as a means of developing an international presence and expanding their market share. This market penetration strategy is often more cost-effective than trying to build an overseas operation from scratch. (Location 435)

Tags: ma, globalisation

Note: .globalisation

Many deals are driven by the premise that it is less expensive to buy brand loyalty and customer relationships than it is to build them. Buyers are paying a premium for this intangible asset on the balance sheet, which is often referred to as goodwill. (Location 441)

Tags: loyalty, brand

Note: It can be less expense to buy brand loyalty than to build it

Classic mistakes include a lack of adequate planning, an overly aggressive timetable to closing, a failure to really look at possible post-closing integration problems, and, worst of all, projecting synergies to be achieved that turn out to be illusory. (Location 458)

Tags: ma

Note: .ma post closing synergies are very important

The key premise of synergy is that “the whole will be greater than the sum of its parts.” (Location 462)

Tags: mergers

Every company says that it wants synergy when doing a deal, but few take the time to develop a transactional team, draw up a joint mission statement of the objectives of the deal, or solve post-closing operating or financial problems on a timely basis. (Location 464)

Tags: synergy, ma

Note: .ma .synergy

For the buyer, the key motivators in an acquisition (which will be discussed in more detail in Chapter 3) usually include one or more of the following: Revenue enhancement Cost reduction Vertical and/or horizontal operational synergies or economies of scale Growth pressures from investors Underutilized resources A desire to reduce the number of competitors (increase market share and reduce price competition) A need to gain a foothold in a new geographic market (especially if the current market is saturated) A desire to diversify into new products and services (Location 493)

Tags: ma

Note: .ma

One key decision with respect to assembling the team is whether to use an investment banker to find and evaluate targets, or whether the deal flow will be generated internally through screening, networking, and industry contacts. In many cases, the sellers (or at least those that have declared their businesses eligible for sale) may have hired intermediaries. Using an investment banker can save valuable time and money and can put you at parity with the seller’s representation; chasing after the wrong sellers or even trying to figure out which companies have expressed an interest in selling can be costly and time-consuming. (Location 935)

Note: Use an investmennt banker to find companies looking to sell

The buyer’s planning and implementation of an acquisition program typically involves the following steps: 1.Develop acquisition objectives. (Why? What? Where? How? Who?) 2.Analyze the projected economic and financial gains to be achieved by the acquisition. 3.Assemble an acquisition team (managers, attorneys, accountants, and investment bankers) and begin the search for acquisition candidates. 4.Perform due diligence analysis of prime candidates (test the premise of the deal). 5.Initial negotiations and valuation of the selected target. (How much can we really pay and how? Determine price and terms.) 6.Select the structure of the transaction. 7.Identify sources of financing for the transaction. 8.Engage in detailed bidding and negotiations. 9.Obtain all shareholder and third-party consents and approvals. 10.Perform phase II confirmatory due diligence. (Were our assumptions accurate? Do deal terms need to change? What protections do we need?) 11.Structure the legal documents. 12.Prepare for the closing. 13.Hold the closing. 14.Implement post-closing tasks and responsibilities. 15.Oversee the integration of the two entities. 16.Focus on long-term integration. (Location 948)

Why is change planning a key part of any acquisition strategy? For the same reason that synergy is a key consideration in mergers and acquisitions. If a buyer pays exactly what the business is worth on a stand-alone basis, then any benefit obtained from the planned changes (i.e., synergy) is profit to the buyer. Conversely, if a buyer adds no value to the seller’s operations, then paying fair value does not make the buyer any better or worse off than it would be without the transaction. This basic economic principle provides the reason why buying companies makes sense in today’s economy. Simply, if a company is worth more to a buyer than to a seller, then there is reason to do a deal where both parties win. (Location 970)

Tags: mergers

APPLYING THE CRITERIA: HOW TO NARROW THE FIELD Once all of the pertinent issues just mentioned have been addressed in the acquisition plan, defining the selection criteria and screening the candidates should be relatively easy. The more typical criteria include some of the following: A history of stable financial and growth performance over different market cycles and under different conditions A market leader in its industry niche and in its geographic region A company with a recognized brand name and established market share Products that are not susceptible to obsolescence or rapid technological change A strong management team with research and development capability Stable and economically favorable relationships with customers, vendors, creditors, and debtors Room for growth or excess capacity in manufacturing or production A minimum and maximum range of revenue (e.g., from $15 to $25 million) A range of cash flow or earnings before interest, taxes, depreciation, and amortization (EBITDA) A defined range for the purchase price A range for the purchase price addressing a preferred ratio of stock, cash, and earn-out Geographical location An existing management team that agrees to remain in place for up to a specified number of years (Location 1079)

The Letter of Intent and Other Preliminary Matters

this stage of the transaction, both the seller and the buyer (and their respective advisors) have developed a strategic plan and a tentative timetable for completion of the deal, have completed their analysis as to why the transaction is a strong financial and strategic fit for each party, and hopefully have taken the time to understand each other’s perspective and the competing as well as aligned objectives. Buyers may enlist a financial advisor to assist in getting to this stage and helping the buyer ensure it is making decisions consistent with its financial and business goals. Thus, often the first agreement the buyer enters into in preparation of an acquisition is with its financial advisor, traditionally in the form of an engagement letter. The terms in an engagement letter must be carefully negotiated to account for the myriad of possible outcomes a buyer could encounter in the early stages of an acquisition. (Location 1172)

Tags: engagementletter

Note: .engagementletter

In addition to creating a framework for any potential deal with the prospective buyer, an LOI is a catalyzing event in most deals. Receiving an LOI, even one that has unacceptable terms, gives the investment banker the opportunity to reach out to each of the target buyers and accelerate the “go/no-go” decision. In a normal process, the investment banker strives to keep the potential buyers on a common time frame. However, the first LOI drives the timing of the process and, furthermore, provides a solid framework for more specific price negotiations. (Location 1195)

Tags: loi

Note: .loi

There are many different styles of drafting letters of intent, which vary from law firm to law firm and from business lawyer to business lawyer. These styles usually fall into one of three categories: (1) binding, (2) nonbinding, and (3) hybrids, like the model in Figure 4-2. In general, the type to be selected will depend upon (1) the timing and the scope of the information to be released publicly concerning the transaction (if any), (2) the degree to which negotiations have been definitive and the necessary information has been gathered, (3) the cost to the buyer and the seller of proceeding with the transaction prior to the making of binding commitments, (4) the rapidity with which the parties estimate that a final agreement can be signed, (5) the valuation ranges for the seller’s company that have been discussed to date, (6) the degree to which the buyer needs or wants a period of exclusivity (and the degree to which the seller is willing to grant an exclusivity period, (7) the relative status of the parties and leverage that both the buyer and seller have, and (8) the degree of confidence each party has in the good faith of the other party and the absence (or presence) of still other parties that are competing for the transaction. In most cases, the hybrid format, which contains both binding and nonbinding terms, is the most effective format to protect the interests of both parties and to level the playing field from a negotiations perspective. (Location 1216)

Tags: loi

Note: .loi

a well-drafted letter of intent will provide an overview of matters that require further discussion and consideration, such as the exact purchase price. Although an exact and final purchase price cannot realistically be established until due diligence has been completed, the seller may hesitate to proceed without a price commitment. (Location 1231)

Tags: loi

Note: .loi loi has a price and areas for doscussion

Instead of creating a fixed price, however, the letter of intent will typically incorporate a price range that is qualified by a clause or provision setting forth all of the factors that will influence and affect the calculation of a final fixed price, such as balance sheet adjustments, due diligence surprises or problems, a change in the health of the company, or overall market conditions during the transaction period, and sometimes even an “upside surprise” in favor of the seller when a significant positive development occurs during the transaction period (e.g., the settlement of litigation, the award of important intellectual property rights, or a big new contract or customer commitment) that had not been included when the valuation range was established. (Location 1233)

Tags: loi

Note: .loi has a price range

PREPARATION OF THE WORK SCHEDULE Following the execution of the letter of intent, one of the first responsibilities of the purchaser’s legal counsel is to prepare a comprehensive schedule of activities (work schedule) that will serve as a task checklist and assignment of responsibilities. This schedule should be prepared well before the due diligence discussed in Chapter 5 begins. The primary purpose of the schedule is to outline all of the events that must occur and the documents that must be prepared prior to the closing date and beyond. In this regard, purchaser’s legal counsel acts as an orchestra leader, assigning primary areas of responsibility to the various members of the acquisition team as well as to the seller and its counsel. Purchaser’s counsel must also act as a taskmaster to ensure that the timetable for closing is met. Once all tasks have been identified and assigned, and a realistic timetable for completion has been established, then a firm closing time and date can be preliminarily determined. (Location 1400)

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Note: .dd

Figure 4-3. Work Schedule for an Asset Purchase Transaction (Location 1430)

Tags: workschedule

Note: .workschedule

Due Diligence

The due diligence process involves:

- legal

- financial

- strategic Review of all of the seller’s documents, contractual relationships, operating history, and organizational structure.

Due diligence is not just a process; it is also a reality test—a test of whether the factors that are driving the deal and making it look attractive to the parties are real or illusory. Due diligence is not a quest to find the deal breakers; it is a test of the value proposition underlying the transaction to make sure that the inside of the house is as attractive as the outside. (Location 1466)

Tags: ma, duediligence

Note: .duediligence

the seller’s team must organize the documents and prepare the data room. Although electronic data rooms, which are especially important to cross-border M&A transactions, have improved the efficiency of the due diligence process, the seller still must commit substantial resources to assembling the documents. (Location 1484)

Tags: dataroom

Note: .dataroom the seller populates the dataroom

The due diligence work is usually divided between two working teams: (1) the financial and strategic team, which is typically managed by the buyer’s management team with assistance from its accountants, and (2) the legal team, which involves the buyer’s counsel with appropriate assistance from technical experts such as environmental engineers and export compliance specialists, depending on the nature of the target’s business. Throughout the process, both teams compare notes on open issues and potential risks and problems. The legal due diligence focuses on potential legal issues and problems that may prove to be impediments to the transaction. It also sheds light on how the transaction should be structured and the contents of the transaction documents, such as the representations and warranties. The business due diligence focuses on the strategic and financial issues in the transaction, such as confirmation of the past financial performance of the seller; integration of the human and financial resources of the two companies; confirmation of the operating, production, and distribution synergies and economies of scale to be achieved by the acquisition; and the collection of information necessary for financing the transaction. (Location 1489)

Tags: due

Note: .due diligence two streams, financial/strategic and legal. Legal focus on legal issues which may impede the transaction. It informs the structuring of the transaction, eg warranties annd indemnities

due diligence is not a perfect process and should not be a tedious fishing expedition. Like any audit, a due diligence process is designed to answer the important questions and provide reasonable assurance that the seller’s claims about the business are fair and legitimate. (Location 1509)

Tags: duediligence

Note: .duediligence it is not perfect. Focuses on the important points

In addition to the bankruptcy context, the increasingly common use of auctions managed by investment banks or other financial advisors has affected early-stage due diligence activities. While sellers typically permit interested bidders to examine data room documents and submit follow-on questions, full-scale due diligence generally is not permitted until the seller has selected the winning bidder following a review of the prospective buyers’ markups of a proposed acquisition agreement. Buyers frequently propose numerous additional revisions to the acquisition agreement based on their subsequent due diligence, but sellers often impose tight deadlines on the winning bidders and otherwise attempt to limit the due diligence–driven revisions to a bare minimum. (Location 1516)

Tags: auction, duediligence, ma

Note: .ma .duediligence .auction limited info in the dataroom. Full scale due diligence takes place later on in the process.

seller negotiates for carve-outs (e.g., a minimum “basket” of liabilities before the buyer may seek reimbursement for undisclosed or unexpected liabilities), (Location 1524)

including the period during which the buyer may assert claims (referred to as the “survival” period for representations and warranties), (Location 1526)

key objective of due diligence is not only to confirm that the deal makes sense (e.g., to confirm the factual assumptions and preliminary valuations underlying the terms by which the buyer negotiates the transaction), but also to determine whether the transaction should proceed at all. (Location 1532)

Tags: duediligence

Note: .duediligence

the due diligence team is on a risk discovery and assessment mission, looking for potential problems and liabilities (the search) and finding ways to resolve these problems prior to closing and to ensure that risks are allocated fairly and openly after the closing. (Location 1539)

Tags: duediligence

Note: .duediligence team look for issues and potential problems

The science of due diligence is in the preparation of comprehensive and customized checklists of the specific questions to be presented to the seller, in maintaining a methodical system for organizing and analyzing the documents and data provided by the seller, and in quantitatively assessing the risks raised by those problems that are discovered in the process. One of the key areas is detection of the seller’s obligations, particularly those that the buyer will be expected or required to assume after closing (especially in a stock purchase transaction or comparable merger; in an asset purchase, purchased liabilities are specifically defined, subject to a few successor liabilities that cannot be contractually avoided). The due diligence process is designed first to detect the existence of the obligations, and second to identify any defaults or problems in connection with these obligations that will affect the buyer after closing. (Location 1541)

Tags: star, duediligence

Note: .duediligence .star maiintain checklists of questions for the seller, process for analysing docs and assesing risks identified

Astute buyers typically employ comprehensive due diligence checklists that are intended to guide the company’s management team while it works closely with counsel to gather and review all legal documents that may be relevant to the structure and pricing of the transaction; to assess the potential legal risks and liabilities to the buyer following the closing; and to identify all of the consents… (Location 1548)

Tags: duediligence

Note: .duediligence

due diligence checklist, however, should be a guideline, not a crutch. The buyer’s management team must take the lead in developing questions that pertain to the nature of the seller’s business. These questions will set the pace for the level of detail and adequacy of the review. The key point here is that every type of business has… (Location 1553)

Tags: duediligence

Note: .duediligence must customise questions depending on the sellers type of business

Common Mistakes Made by the Buyer During the Due Diligence Investigation 1.Mismatch between the documents provided by the seller and the skills of the buyer’s review team. The seller may have particularly complex financial statements or highly technical reports that must be truly understood by the buyer’s due diligence team. Make sure that there is a capability fit. 2.Poor communication and misunderstandings. The communications between the teams of the buyer and the seller should be open and clear. The process must be well orchestrated. 3.Lack of planning and focus in the preparation of the due diligence questionnaires and in the interviews with the seller’s team. The focus must be on asking the right questions, not just a lot of questions. Sellers will resent wasteful “fishing expeditions” when the buyer’s team is unfocused. 4.Inadequate time devoted to tax and financial matters. The buyer’s (and seller’s) CFO and CPA must play an integral part in the due diligence process in order to gather data on past financial performance and tax reporting, unusual financial events, or disturbing trends or inefficiencies. 5.Lack of reasonable accommodations and support for the buyer’s due diligence team. The buyer must insist that its team be treated like welcome guests, not like enemies from the IRS! Many times, buyer’s counsel is sent to a dark room in a corner of the building to inspect documents, without coffee, windows, or phones. It will enhance and expedite the transaction if the seller provides reasonable accommodations and support for the buyer’s due diligence team. 6.Ignoring the… (Location 1558)

Post-closing synergies and integration success are also highly unlikely when one or more of the buyer or seller’s human capital assets are grossly underperforming or feeling deeply underappreciated and focused on almost anything but their core tasks at hand. Leadership and governance teams on both sides of the transaction as well as their advisors are often either in denial as to the extent of the problem or lack the strategic tools to remedy the key challenges. (Location 1637)

For example, I worked on a deal that involved the purchase of a hockey league in the Midwest. It was easy to prepare the standard due diligence list and draw up questions regarding:

- corporate structure and history

- the status of the stadium leases, and team tax returns,

- the steps that had been taken to protect the team trademarks.

The more difficult task was developing a customized list. In my role as legal counsel, I asked my client the question, “If you were buying a sports league, what would you need to review?” (Location 1662)

Note: Need to cuustomise questions


In analyzing the company for sale, the buyer’s team carefully reviews and analyzes the following legal documents and records, where applicable. I. Corporate Matters A. Corporate records of the seller •Certificate of incorporation and all amendments •Bylaws as amended •Minute books, including resolutions and minutes of all directors’ and shareholders’ meetings •Current shareholders list (certified by the corporate secretary), annual reports to shareholders, and stock transfer books •A list of all states, countries, and other jurisdictions in which the seller transacts business or is qualified to do business •Applications or other filings in each state listed in (5), for qualification as a foreign corporation and evidence of qualification •Locations of business offices (including overseas) B. Agreements among the seller’s shareholders C. All contracts restricting the sale or transfer of shares of the company, such as buy/sell agreements, subscription agreements, offeree questionnaires, or contractual rights of first refusal; all agreements for the right to purchase shares, such as stock options or warrants; and any pledge agreements by an individual share holder involving the seller’s shares (Location 1682)

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Note: .dd

II. Financial Matters A. Copies of management and similar reports or memoranda relating to the material aspects of the business operations or products B. Letters of counsel in response to auditors’ requests for the preceding five years C. Reports of independent accountants to the board of directors for the preceding five years D. Revolving credit and term loan agreements, indentures, and other debt instruments, including, without limitation, all documents relating to shareholder loans E. Correspondence with principal lenders to the seller F. Personal guarantees of the seller’s indebtedness by its shareholders or other parties G. Agreements by the seller where it has served as a guarantor for the obligations of third parties H. Federal, state, and local tax returns and correspondence with federal, state, and local tax officials I. Federal filings regarding the Subchapter S status of the seller (where applicable) J. Any private placement memorandum (assuming, of course, that the seller is not a Securities Act of 1934 “reporting company”) prepared and used by the seller (as well as any document used in lieu of a private placement memorandum, such as an investment profile or a business plan) K. Financial statements of the seller, which should be prepared in accordance with GAAP, for the past five years, including: •Annual (audited) balance sheets •Monthly (or other available) balance sheets •Annual (audited) and monthly (or other available) earnings statements •… ... An informal schedule of key management compensation (listing information for at least the ten most highly compensated management employees or consultants) N. Financial aspects of overseas operations (where applicable), including the status of foreign legislation, regulatory restrictions, intellectual property protection, exchange controls, methods for repatriating profits, foreign manufacturing, government controls, import/export licensing and tariffs, and so on O. Projected budgets, accounts… (Location 1697)

Management and Employment Matters A. All employment agreements B. Agreements relating to consulting, management, financial advisory services, and other professional engagements C. Copies of all union contracts and collective bargaining agreements D. Equal Employment Opportunity Commission (EEOC) and any state equivalent compliance files E. Occupational Safety and Health Administration (OSHA) files, including safety records and workers’ compensation claims F. Employee benefit plans (and copies of literature issued to employees describing such plans), including the following: •Pension and retirement plans, including union pension or retirement plans •Annual reports for pension plans, if any •Profit-sharing plans •Stock option plans, including information concerning all options, stock appreciation rights, and other stock-related benefits granted by the company •Medical and dental plans •Insurance plans and policies (including errors and omissions policies and directors’ and… ... All current contract agreements with or pertaining to the seller and to which directors, officers, or shareholders of the seller are parties, and any documents relating to any other transactions between the seller and any director, officer, or shareholders, including receivables from or payables to directors, officers, or shareholders H. All policy and procedures manuals of the seller concerning personnel; hiring and promotional practices; compliance with the Family Leave Act; drug and alcohol abuse policies; AIDS policies; sexual harassment policies; vacation and holiday policies; expense reimbursement… (Location 1726)

Tangible and Intangible Assets of the Seller A. List of all commitments for rented or leased real and personal property, including location and address, description, terms, options, termination and renewal rights, policies regarding ownership of improvements, and annual costs B. List of all real property owned, including location and address, description of general character, easements, rights of way, encumbrances, zoning restrictions, surveys, mineral rights, title insurance, pending and threatened condemnation, hazardous waste pollution, and so on C. List of all tangible assets D. List of all liens on all real properties and material tangible assets E. Mortgages, deeds, title insurance policies, leases, and other agreements relating to the properties of the seller F. Real estate tax bills for the real estate of the seller G. List of patents, patents pending, trademarks, trade names, copyrights, registered and proprietary Internet addresses, franchises, licenses, and all other intangible assets, including registration numbers, expiration dates, employee invention agreements and policies, actual or threatened infringement actions, licensing agreements, and copies of all correspondence relating to this intellectual property H. Copies of any survey, appraisal, engineering, or other reports relating to the properties of the seller I. List of assets that may be held on a consignment basis (or that may be the property of a given customer), such as machine dies, molds, and so on (Location 1750)

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Note: .dd

Material Contracts and Obligations of the Seller A. Material purchase, supply, and sale agreements currently outstanding or projected to come to fruition within twelve months, including the following: •List of all contracts relating to the purchase of products, equipment, fixtures, tools, dies, supplies, industrial supplies, or other materials having a price under any such contract in excess of $5,000 •List of all unperformed sales contracts B. Documents incidental to any planned expansion of the seller’s facilities C. Consignment agreements D. Research agreements E. Franchise, licensing, distribution, and agency agreements F. Joint-venture agreements G. Agreements for the payment or receipt of license fees or royalties and royalty-free licenses H. Documentation relating to all property, liability, and casualty insurance policies owned by the seller, including for each policy a summary description of: •Coverage •Policy type and number •Insurer/carrier and broker •Premium •Expiration date •Deductible •Any material changes in any of the foregoing since the inception of the seller •Claims made under such policies ... Agreements restricting the seller’s right to compete in any business J. Agreements for the seller’s current purchase of services, including, without limitation, consulting and management K. Contracts for the purchase, sale, or removal of electricity, gas, water, telephone, sewage, power, or any other utility service L. List of waste dumps, disposal, treatment, and storage sites M. Agreements with any railroad, trucking, or other transportation company or courier service N. Letters of credit O. Copies of any special benefits under contracts or government programs that might be in jeopardy as a result of the proposed transaction (e.g., small business or minority set-asides, intra-family transactions or favored pricing, internal leases or allocations, and so on) P. Copies of licenses, permits, and government approvals applied for or issued to… (Location 1766)

Litigation and Claims, Actual and Contingent A. Opinion letter from each lawyer or law firm prosecuting or defending significant litigation to which the seller is a party, describing such litigation B. List of material litigation or claims for more than $5,000 against the seller asserted or threatened with respect to the quality of the products or services sold to customers, warranty claims, disgruntled employees, product liability, government actions, tort claims, breaches of contract, and so on, including pending or threatened claims C. List of settlement agreements, releases, decrees, orders, or arbitration awards affecting the seller D. Description of labor relations history E. Documentation regarding correspondence or proceedings with federal, state, or local… (Location 1799)

VII. Miscellaneous A. Press releases (past two years) B. Résumés of all key members of the management team C. Press clippings (past two years) D. Financial analyst reports, industry surveys, and so on E. Texts of speeches by the seller’s management team, especially if reprinted and distributed to the industry or the media F. Schedule of all outside advisors, consultants, and so on, used by the seller over the past five years (domestic and international) G. Schedule of… (Location 1810)

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The buyer’s acquisition team and its legal counsel gather data to answer the following ten legal questions during the legal phase of due diligence: 1.What legal steps will need to be taken to effectuate the transaction (e.g., is director and stockholder approval needed, or are there share transfer restrictions or restrictive covenants in loan documentation)? Has the appropriate corporate authority been obtained to proceed with the agreement? What key third-party consents (e.g., FCC, DOJ, lenders, venture capitalists, landlords, or key customers) are required? 2.What antitrust problems, if any, are raised by the transaction? Will filing with the Federal Trade Commission (FTC) be necessary under the premerger notification provisions of the Hart-Scott-Rodino Act? 3.Will the transaction be exempt from registration under applicable federal and state securities laws under the “sale of business” doctrine? 4.What significant legal problems or issues are affecting the seller now or are likely to affect the seller in the foreseeable future? What potential adverse tax consequences to the buyer, the seller, and their respective shareholders may be triggered by the transaction? 5.What are the potential post-closing risks and obligations of the buyer? To what extent should the seller be held liable for such potential liabilities? What steps, if any, can be taken to reduce these potential risks or liabilities? What will it cost to implement these steps? 6.What are the impediments to the assignability of key tangible and intangible assets of the seller company that are desired by the buyer, such as real estate, intellectual property, favorable contracts or leases, human resources, or plant and equipment? 7.What are the obligations and responsibilities of the buyer and the seller under applicable environmental and hazardous waste laws, such as the Comprehensive Environmental Response Compensation and Liability Act (CERCLA)? 8.What are the obligations and responsibilities of the buyer and… ... what extent will employment, consulting, confidentiality, or noncompetition agreements need to be created or modified in… (Location 1819)

In conducting the due diligence from a business perspective, the buyer’s team is likely to encounter a wide variety of financial problems and risk areas when analyzing the seller. These typically include an undervaluation of inventory, overdue tax liabilities, inadequate management information systems, related-party transactions (especially in small, closely held companies), an unhealthy reliance on a few key customers or suppliers, aging accounts receivable, unrecorded liabilities (e.g., warranty claims, vacation pay, claims, and sales returns and allowances), or an immediate need for significant expenditures as a result of obsolete equipment, inventory, or computer systems. (Location 1852)

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There is a virtually infinite number of potential problems and exposure areas for the buyer that may be uncovered in the review and analysis of the seller’s documents and operations. The specific issues and problems will vary based on the size of the seller, the nature of its business, and the number of years that the seller (or its predecessors) has been in business. (Location 1936)

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Note: .dd the types of problemms wiill deppend on the nature of the business, size of the seller and years in business

Clouds” in the title to critical tangible (real estate, equipment, inventory) and intangible (patents, trademarks, and so on) assets. Be sure that the seller has clear title to these assets and that they are conveyed without claims, liens, and encumbrances. Employee matters. There are a wide variety of employment or labor law issues or liabilities that may be lurking just below the surface but will not be uncovered unless the right questions are asked. Questions designed to uncover wage and hour law violations, discrimination claims, OSHA compliance, or even liability for unfunded persons under the Multiemployer Pension Plan Amendments Act should be developed. If the seller has recently made a substantial workforce reduction (or if you as the buyer are planning post-closing layoffs), then the requirements of the Worker Adjustment and Retraining Notification Act (WARN) must have been met. The requirements of WARN include minimum notice of sixty days prior to wide-scale terminations. The possibility of environmental liability under CERCLA or related environmental regulations. Unresolved existing or potential litigation. These cases should be reviewed carefully by counsel. A seller’s attempt to “dress up” the financial statements prior to sale. Often this is an attempt to hide inventory problems, research and development expenditures, excessive overhead and administrative costs, uncollected or uncollectible accounts receivable, unnecessary or inappropriate personal expenses, unrecorded liabilities, tax contingencies, and other such issues. (Location 1940)

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The key terms of the purchase agreement will often be dictated by four major variables: 1.The relative drafting and negotiating skill of each party’s legal counsel 2.The special risks and unique structural challenges of the transaction (typically a reflection of problems identified during due diligence) 3.The relative bargaining strength of the parties 4.Market conditions at the time the transaction is consummated On this fourth point, it is critical to understand that there is a wide variety of terms and conditions in the purchase agreement that may vary depending on the state of the overall economy. What terms may be “fair and reasonable” or “market” will be driven both by the specifics of the transaction and by whether the marketplace at the time of the deal is viewed as being more heavily weighted in favor of sellers, such as in 2006 and 2007, or in favor of qualified and cash-flush buyers, such as in 2008 and 2009. (Location 3972)

Indemnity provisions, along with opinions of counsel, are usually among the most contested negotiated items in a purchase agreement. The key variables to be negotiated, as set forth here, include time (the period of indemnity for post-closing obligations), the deductibles/baskets, the “caps” or ceilings on liability, one measure of damages, and the possible offsets to the seller’s obligation to indemnify. The seller will usually be unwilling to provide a comprehensive set of indemnity provisions. (Location 4144)

Depending on which side of the fence you are on, look out for words or phrases like the following as tools for negotiation and as phrases: “materially” “to the best of our knowledge” “could possibly” “without any independent investigation” “except for . . .” “subject to . . .” “reasonably believes . . .” “ordinary course of business” “to which we are aware” “would not have a material adverse effect on . . .” “primarily relating to . . .” “substantially all” “solely” “might” (instead of “would”) “exclusively” “other than claims that may be less than $” “have received no written notice of . . .” “have used our best efforts (or commercially reasonable efforts) to . . .” “endeavor to (Location 4417)

As discussed earlier in this chapter, the heart and soul of the purchase agreement is, in many ways, merely a tool for allocating risk. The buyer will want to hold the seller accountable for any post-closing claim or liability that arises relating to a set of facts that occurred while the seller owned the company or that has occurred as a result of a misrepresentation or material omission by the seller. (Location 4445)

Note: The purchase agreement is about the allocation of risk