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Buying and Selling Companies & Businesses

Zachary has over 20 years of legal experience buying and selling companies and businesses, which is also known as Mergers and Acquisitions (or “M&A”). 


The largest transaction that Zachary handled was over $1.2 Billion (yes, Billion with a “B”).  However, Zachary also handles transactions that are much smaller, and sometimes less than $1 million.


Regardless of the size of the transaction, some of the general steps involved in the buying and selling of a company or business are as follows:


Step 1.  Letter of Intent.

A Letter of Intent (“LOI”) is drafted by the attorney on behalf of either the potential buyer, or the potential seller.  The LOI is normally not a legally binding agreement, because it is merely an “intention” to buy or sell.  LOIs normally contain only the main points of the deal.  An LOI can be between approximately 3 to over 5 pages, depending on the size of the transaction.


Step 2.  Negotiations/Revisions.

If one of the parties does not agree to the initial LOI, then the parties negotiate those terms through their attorneys.


Step 3.  Sign the LOI.

If both parties agree to the terms in an LOI, then the parties sign the LOI.


Step 4.  Draft the Asset Purchase Agreement.

After both parties sign the LOI, one of the parties will have their attorney draft an Asset Purchase Agreement (“APA”).  The APA will contain all of the main terms in the LOI, as well as other additional language.  An APA can be between approximately 10 to over 20 pages, again, depending on the size of the transaction.


Step 5.  Negotiations/Revisions.

Sometimes, a short amount of time can be spent negotiating the initial APA.  Other times, a great amount of time can be spent negotiating the initial APA.  The amount of time spent negotiating the initial APA depends on a variety of different factors.  Sometimes during the negotiation process of the APA, one of the parties may decide to simply call off the deal, again, for a variety of different reasons.  If either party calls off the deal during the negotiation stage of the APA, then there are usually no consequences (unless otherwise provided in the LOI).


Step. 5.  Sign the APA and Payment of the Deposit/Down Payment.

If both parties ultimately agree to a final version of the APA, then both parties proceed to signing the APA, and the buyer pays the deposit/down payment.


Step 6.  Due Diligence.

After the APA is signed and the deposit has been paid, the Due Diligence phase commences.  This is the phase where the buyer performs comprehensive research and investigation on the company.  The Due Diligence phase normally can take from 45 days to well over 120 days, depending on the size of the transaction.  During this phase, buyers retain a CPA to do a financial audit of the company’s tax returns and related financial records.


The Due Diligence phase generally includes an analysis of the following:


A.   Corporate Records
   1.    Corporate charter, as amended to date, including pending amendments.
   2.    Bylaws or equivalent document, as amended to date, including pending amendments.
   3.    Minutes/other records of all proceedings of the Board of Directors (or equivalent body) and shareholders of the Company.
   4.    List of jurisdictions in which the Company does business, owns or leases real property, or otherwise operates, and all foreign qualification documents.
   5.    List of subsidiaries and other entities in which the Company has an equity investment, if any.
   6.    Corporate records for subsidiaries.

B.    Stock Records/Documents
   1.    Stock record books.
   2.    Current shareholder list, with names and addresses.
   3.    Copies of all employee stock option plans or other equity incentive plans, related agreements, and a list of all outstanding stock options, including vesting schedules, exercise prices, and dates of grant.
   4.    Copies of any agreements to which the Company is a party, relating to:
       a.    A commitment to issue or sell securities.
       b.    A commitment or option to repurchase securities.
       c.    Past issuances or repurchases of securities (debt and equity).
       d.    Rights of first refusal.
       e.    Preemptive rights.
       f.    Restrictions on transfer of stock.
   5.    Warrants or other rights to purchase securities.
   6.    Voting trusts or voting agreements to which the Company is a party or of which it is aware.

C.    Financial Records
   1.    Audited financial statements for the past three fiscal years.
   2.    Most recent internal business plan.
   3.    Reports, studies, or appraisals on financial condition or business of the Company.
   4.    Auditors’ management letters with respect to the past three fiscal years.
   5.    Latest internal financial statements.
   6.    Copies of all materials sent to all directors and/or all shareholders within past 12 months relating to the Company.
   7.    Federal, state, and local tax returns (income, sales, use, and franchise tax) and other correspondence with taxing agencies for the preceding three years.

D.    Financing Matters

    1.    Credit agreements, loan agreements, and lease agreements.
   2.    Security agreements, mortgages, and other liens,
   3.    Guarantees by the Company of third-party obligations,
   4.    Agreements restricting the payment of cash dividends,

E.    Material Contracts, Agreements, and Policies
   1.    All agreements between the Company and its directors, officers, subsidiaries, or affiliates (including information regarding unwritten commitments or understandings).
   2.    All (a) supply agreements, (b) VAR agreements, (c) distributorship agreements, (d) marketing agreements, and (e) product development agreements.
   3.    Documentation relating to:
       a.     Investments in other companies or entities. 
       b.     Acquisitions of companies or assets.
       c.     Disposition of assets.
   4.    Joint venture, cooperative, franchise, or dealer agreements.
   5.    List of principal or exclusive suppliers and vendors.
   6.    Any document restricting an issuance of the Company's securities.
   7.    Any standard customer terms and conditions of sale or license.
   8.    All other material contracts, agreements, and policies.

F.    Personnel Matters
   1.    Employment and consulting agreements    .
   2.    Nondisclosure, development, assignment, and noncompetition agreements with any employee, consultant, or independent contractor, and list of employees who are not parties to such an agreement.
   3.    Employee benefit plans, programs, or agreements (pension, health, deferred compensation, bonus, profit-sharing, and any other benefit plans).
   4.    Loans and guarantees to or from directors, officers, or employees.
   5.    Personnel manuals and policies, including policies regarding vacation, severance, disability benefits, supplemental unemployment benefits, pre- and postretirement health and medical benefits, transfer, and other material personnel matters..
   6.    Resumes for all senior management of the Company (including all vice presidents).
   7.    List of all officers, directors, and key employees of the Company, including a schedule of all salaries, bonuses, fees, commissions, and other benefits paid to such persons (or accrued) for the latest fiscal year.
   8.    Agreements with unions, collective bargaining agreements, and other labor agreements.
   9.    List of labor disputes, grievances, arbitrations, governmental investigations, unfair labor practices and litigation, including under equal employment, age, and occupational safety and health laws and regulations.

G.    Intellectual Property Matters
   1.    Schedule of all trademark, copyright, and patent registrations or applications, and related filings.
   2.    A catalog of each computer program used by the Company in the conduct of its business (the “Software Programs”), including, but not limited to, the title and description of each such Software Program.  
   3.    All records and documentation maintained by the Company documenting the development, authorship, or ownership of the Software Programs and related technology.  
   4.    List of all third party software or other items or materials (including work under U.S. government ownership) incorporated in the Software Programs.
   5.    List of all agreements or understandings with third parties, whether now in effect or terminated, for the design, development, programming, enhancement, or maintenance of the Software Programs.
   6.    List of agreements involving disclosure of source code relating to the Software Programs.
   7.    Description of the devices, programming, or documentation required to be used in combination with the source code relating to the Software Programs for the effective development, maintenance, and implementation of the Software Programs (e.g., compilers, workbenches, tools, and higher level or proprietary languages).
   8.    List of agreements, options, or other commitments giving anyone any rights to acquire any right, title, or interest in the Software Programs or related technology.
   9.    List of unregistered trademarks and service marks.
   10.    License and technology agreements.
   11.    All documents, materials, and correspondence relating to any clams or disputes with respect to any intellectual property rights of the Company or any of its subsidiaries or any third party.

H.    Real and Personal Property Matters
   1.    List of all offices and other facilities.
   2.    Leases or subleases of real property.
   3.    Deeds and mortgages.
   4.    Purchase or lease agreements for material equipment or other personal property.

I.    Insurance Matters
   1.    Summary of insurance coverage (casualty, personal property, real property, title, general liability, business interruption, workers' compensation, product liability, key person, automobile, and/or directors’ and officers’ liability, and self-insurance programs).
   2.    List of any insurance claims (whether or not settled) since incorporation.
   3.    Indemnification agreements.

J.    Litigation Matters
   1.    Threatened or pending litigation, claims, and proceedings.
   2.    Consent decrees, settlement agreements, and injunctions.
   3.    All attorneys’ auditors’ letters to accountants since incorporation.
   4.    Consents, decrees, judgments, orders, settlement agreements, or other agreements to which the Company is bound requiring or prohibiting any activity.

K.    Compliance with Laws
   1.    Material government permits and consents.
   2.    Governmental proceedings or investigations threatened, pending, settled, or concluded.
   3.    Reports to and correspondence with government agencies.
   4.    Regulatory filings since inception.
   5.    All internal and external environmental audits.

L.    Business Information
   1.    Press releases, articles, or promotional materials published about the Company since incorporation which are in the Company's possession.
   2.    Any external or internal analyses regarding the Company or its products or competitive companies or products.
   3.    Copies of advertising brochures and other materials currently used by the Company.
   4.    Budgets or projections.


Step 7.  If Issues Are Found During Due Diligence.

If any issues are found during Due Diligence, and the issues cannot be resolved by the end of the Due Diligence period, then either the seller can either agree to reduce the price, or the buyer can cancel the deal.  Alternatively, the parties can agree to other terms, in which case the APA would be modified.  Understandably, negotiations are also had regarding the modification of the APA.


Step 8.  If Issues Are Resolved During Due Diligence.

If all issues are resolved by the seller before the end of the Due Diligence period, or if the buyer agrees to buy at a lower price, then the parties proceed according to the APA.


Step 9.  Closing.

If all of the deadlines in the APA are satisfied, then closing documents are prepared by the attorneys, and the closing occurs.


Other Steps.

There are certainly other steps to consider. Again, the above is just a brief list of steps involved in the buying and selling of companies and businesses.

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