M&A for Entrepreneurs
Mergers and acquisitions
are not only for the big-timers. If you are an aspiring entrepreneur, you should not only be concerned with offering great services and keeping your customers happy. You should also be on the lookout for opportunities whereby you can acquire companies or businesses that can give you an advantage in the market. Are you an entrepreneur looking to acquire a privately owned company?
Here are 5 helpful tips that you should consider before acquiring a business.
The first step every entrepreneur should take before an acquisition is to draft an exclusive agreement asking for a thorough investigation into the company. This agreement is often part of a letter of intent.
A prior agreement would also put you in good stead to avoid any bidding wars that might arise from other prospects. Most sellers would reserve the right for you to negotiate and investigate for 60 days. If you are not ready to buy or you are far from satisfied with the offer, you can allow the seller deal with other parties after the period has passed.
You should spend money on tangible assets and not stocks. A stock transaction gives you access to liabilities under law, whereas in an asset transaction these liabilities are only agreed upon within the agreement. This is not to say that some liabilities are not advantageous to an acquisition. But you need to be aware of any loopholes and protect yourself against any issues that might arise.
The early draft of the acquisition agreement must be prepared to a particular transaction. It is not wise to use a general agreement in this case. This draft would be used for subsequent discussions regarding due diligence investigations, strategy, purchase prices and risk allocations.
The agreement should be well drafted with appropriate representations, warranties and indemnification obligations to protect the interests of the buyer. You should also get a consultant to help you out. The role that your consultant plays is a crucial one.
He must possess a comprehensive knowledge about your business and understand the risks that are involved. This helps you to make smart decisions based on your own terms. There is nothing better than getting someone who knows his way around these things.
One of the most contested issues when acquiring a privately owned company are seller damages. This is neither right nor wrong. It all depends on the type of transaction and the bargaining power of both parties. If there are many people bidding for a company, the ceiling cap might be 7% or less due to the competition involved. If you are the only bidder, you might be in strong position to bargain asking only to pay the purchase price and waive the cap.