Mergers & Acquisitions in SoFla: Everything You Need to Consider

Businesses of all shapes and sizes can undergo mergers and acquisitions to expand their market reach, diversify offerings and break into new segments. Joining two companies through a merger or acquisition can be a fast and efficient way to multiply your book of business and increase shareholder value. If you’re looking to sell, it can also be a productive way to cap off a successful business venture.

But with any transaction, there are risks and there are rewards. Successfully selling your business? Yes, it can come with significant rewards, but first you must navigate the sale and all the potential risks that could come with it if you’re not prepared or don’t have the best legal counsel at your side. 

In this article, we’ll discuss everything you need to consider when evaluating a merger or acquisition opportunity for your Florida business, including

  • What to know before selling your business,
  • How to negotiate your merger and acquisition (M&A) valuation,
  • When to consider an earnout when selling your business,
  • Questions to ask an attorney before acquiring a business,
  • Why you need outside legal counsel for any M&A deal, and more

If you have questions about buying or selling your Florida business, get in touch with our commercial law team at Silverberg|Brito, PLLC. We offer expert legal guidance and support for all your business needs. 

Is a Merger Right for Your Business?

Depending on your company’s goals and interests, there are several different types of mergers a small business may pursue. The choice of whether and which to pursue will be a strategic decision leaders should make in consultation with a commercial attorney as well as other corporate stakeholders and decision-makers. 

While there are many types of small business mergers, the following three are most common:

  • Horizontal mergers – This type of merger is common when your goal is to increase market share. Horizontal mergers involve a business deal in which two companies that offer essentially the same products or services join together to create a larger business entity. The volume of business goes up and the average cost to do that business goes down because you can reduce redundancies and achieve economies of scale. 
  • Vertical mergers – The goal of vertical mergers is to create synergy by acquiring another company that is still involved in the same product or service, but is so at a different stage of production. 
  • Concentric or congeneric mergers – When two companies who service a similar industry come together, it’s called a concentric merger. This type of merger allows two complementary businesses to extend their product offering and expand market share by selling a more diverse set of goods or services. 

Mergers make growing your business fast, but they are not without their challenges. If you’re considering merging your business or selling it, there are several important things to evaluate first. 

4 Key Things You Need to Know When Looking to Sell Your Business

While the list below is by no means exhaustive, it’s a good place to start when considering all the variables that can impact a potential sale. Being prepared is perhaps the best advice we can give anyone who is thinking about taking action on a deal as important as a merger or acquisition. Here are some things to know:

  • Business deals can take a long, long time – M&As can be a months-long process. While there are ways to speed things up such as by planning ahead and preparing important documents and contracts in advance, it can still take half a year or longer depending on the deal – and it may not necessarily be something you want to rush. 
  • You need a great M&A lawyer – There’s no getting around – if you are going to sell your business, you need to hire a highly-skilled attorney who has experience and success taking on cases similar to yours. 
  • Yes, you can – and should! – negotiate the letter of intent – A business purchase letter of intent (LOI) is a document shared between a buyer and seller of a business entity. It’s used as a starting point for negotiating the terms of a proposed business deal and includes binding and non-binding provisions. 

While sometimes the buyer can make you feel as if the LOI is non-negotiable, there are absolutely terms that can and should be negotiated prior to signing it. Examples of terms to negotiate include price and how it will be paid, the scope and length of any exclusivity period, indemnification terms, among others.

  • Your financial documents will be thoroughly scrutinized – Any potential buyer needs to know exactly what kind of financial shape a business is in before buying it. This comes as no surprise. What sometimes does come as a surprise is how underprepared sellers are for the vetting a buyer will do. 

Important Intellectual Property Considerations During the M&A Process

Another essential area to consider during an M&A is intellectual property, or IP.. As our economy becomes increasingly reliant on technology and innovation, the role of IP in any M&A also becomes increasingly important because of the immense value it can add to a business. 

If you’re considering an M&A, it’s essential that IP due diligence be part of your investigation process. 

One should never assume IP rights will automatically transfer when a company sells its business or merges with another. In fact, a common issue that comes to light during IP due diligence is to discover there are chain of title issues related to an IP asset. 

Moreover, determining the valuation of IP rights is also a complex but essential exercise during the M&A process. Putting a value on intellectual property can be more nuanced than valuing a piece of physical property but is no less important. 

You’ll want to consider potential replacement costs, the current market value as well as the predicted future value of any IP investment you make as part of an M&A deal.

Can You Negotiate Your M&A Valuation?

While, yes, offer price and valuation in a merger and acquisition deal are negotiable, these negotiations can be complicated, especially when a company’s shares are not publicly traded. 

When there are differences between a buyer’s and seller’s opinion on valuation – and there usually are – it will have to be negotiated in order to bridge the valuation gap.

As you consider how to approach an M&A valuation negotiation, it’s helpful to think through several of the following factors to ensure that a buyer’s offer equals or exceeds the market value of your company. These include, but are not limited to, understanding:

  • The valuation used during your last round of business financing or your company’s most recent 409A valuation.
  • What market comparables are showing and whether you are growing faster than your competitors.
  • Who your buyer is, if there are multiple bidders and whether they are a financial buyer or a strategic buyer.
  • The payout price for recent shares sold by employees or early investors.
  • Whether your company may be in a position to conduct an IPO.

In addition, it’s also important to look back at your company’s historical financial performance and projected growth. You may also consider your business sector, any intellectual property you own or license, and other risks and assets your company holds.

Why You Should Consider Multiple Bidders When Selling Your Business

When selling your business, you only need one motivated buyer with whom you can agree on the terms of your sale, but finding the right one can take some effort.

One way to improve the odds of finding the right committed buyer is to solicit multiple bids. Additionally, there are other reasons why it can be advantageous to have multiple bidders when selling your Florida business. 

  • One is that a multiple-bid scenario can result in a higher price for your business. By initiating a bidding war between interested parties, you may be able to drive up the price of your sale.
  • Second, engaging multiple bidders puts you, as the seller, in the power position. It can give you leverage to make some demands in terms of the sale’s timeline or other contract provisions. 
  • Third, it enables you to have backup buyers if your preferred bidder decides to duck out of the transaction. Knowing you have alternatives may also motivate your buyer to follow through on the deal quickly.

As you compare multiple bids, consider the buyers’ motivation and what brings them to the table in the first place. Look also at the details of their closing conditions. It’s important to evaluate the deal on the whole, rather than focus on a single issue. Your attorney will provide invaluable guidance in this regard.

When to Consider an Earnout When Selling Your Business

As you move farther down the path to a business sale, there become even more factors to consider. One is how to structure the business transaction itself. 

There are countless ways to do so, and while this can be good, it also adds to the complexity of the process. Because you can slice and dice the deal any which way, it can be difficult to identify exactly which way is right for you.

This can be particularly true when it comes to agreeing on the proper price for your business. Not surprisingly, sellers tend to think their business is valued at a higher price than what a buyer may believe. 

In situations where there is a gap in the perceived valuation of a business, an earnout may be a good way to bridge that gap in price.

What is an Earnout?

By definition, an earnout is a contractual provision in which the buyer agrees to pay the seller additional money if the business achieves certain performance metrics after the close of the sale. 

The term of an earnout is typically 1-3 years in length and valued at a percentage of the purchase price. Earnouts are tied to performance and will only be paid if those future targets are met. 

There are a few common scenarios when a seller might consider an earnout:

  • You feel comfortable betting on the future performance of your business.
  • You want to remain involved in the business even after the sale.
  • You believe your business has unrealized potential and is well-positioned for continued growth and success.

As an added benefit to the seller, financing that is spread out over the course of a few years may minimize the tax impact tied to capital gains.

Questions to Ask an Attorney in Due Diligence Before Acquiring a Business

We’ve spent a lot of time talking about what to know when selling your business. What about when acquiringa business?

Undergoing due diligence is an essential component of any business acquisition. This is the time when you can really look under the hood of a business and verify that everything you believe to be accurate and true about the business you’re about to purchase is indeed accurate and true.

During this phase of a business acquisition, there are some important questions you and your attorney need to address, including the following:

  • What do the financial statements reveal? A company’s historical financial documents as well as its future projections are essential to understanding the full picture of the business you’re about to purchase. 
  • Can employee information be verified? Gaining an understanding of the company’s existing organization chart, payroll information and human resources policies will give you an opportunity to learn more about the employees themselves who will become key assets to you once the sale goes through.
  • What does the customer database look like? The long-term success of your acquisition will be heavily impacted by the seller’s customer base and the amount of revenue they generate from them. It’s important to spend time learning everything you can about their existing customers and any issues or concerns related to customer risk or relationships.

These and other strategic business interests should be well-vetted during the due diligence phase of a merger or acquisition. 

In Closing: Why You Need an Experienced Outside Legal Counsel for Any Merger and Acquisition Deal

Successfully navigating a business transaction requires a team of professionals, not the least of which includes experienced legal counsel. 

While in-house counsel remains important, outside counsel provides important benefits for businesses undergoing one of the biggest transactions they may ever take part in. When things go right during a M&A, there can be huge value to gain, but even a seemingly small error can result in disastrous results for one or both parties.

To guide the organization through to the finish line (and beyond), you need a strong team of leaders. On that team should be the CEO, CFO, chief in-house legal counsel, as well as other senior business leaders. In addition, you should partner with an experienced outside legal counsel.

Understanding the Role of Outside Legal Counsel

The role of outside legal counsel in any M&A is to support the in-house team’s efforts and the client’s objectives. 

Everyone on the team has the same goal – to successfully close the deal, but there will be hurdles. An experienced outside legal counsel will be able to anticipate the unexpected, devise solutions to any of these potential obstacles, as well as help successfully navigate what is expected to bring the deal to completion. They also provide a macro-level perspective of the entire transaction because they aren’t fully integrated with the day-to-day needs of the organization.

With the successful growth of any organization comes even more opportunities for growth through a merger or acquisition. As you consider the next step in your business’s development, please come talk to our commercial law team at Silverberg|Brito, PLLC. We offer complimentary consultations to discuss your organization’s legal needs.

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