Tying It All Together
James05
BuyingorSellingaBusiness-1.pptxBuying or Selling a Business
Objectives
Pros & Cons of buying/selling a business
Types of business purchases
Asset Purchase
Stock Purchase
Merger
Merger process
Business Combinations: Pros & Cons
Pros
Immediate liquidity
Fixed value of shares
Access to capital, employees, strategic alliances
Avoid costs/requirements of taking company public
Cons
Potential limit on investment return for shareholders
Loss of control or long-term vision of company if acquired
In the textbook and in this lesson, we will refer to buying or selling a company as a business combination. For many start-ups, buying a business is oftentimes a good way to build to strategic relationships, get access to capital and human resources and grow the geographic footprint of the business. Selling a business is an exit strategy that allows the shareholders to liquidate their interest in the business, sometimes more quickly and predictable than in other exit strategies, such as an IPO.
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Asset Purchase
Image from: http://www.gfmi.com/asset-liability-management/
Now we will get into the various types of business combinations. There are generally two broad categories of business combinations: sale/purchase of assets and sale/purchase of equity. Equity transactions are grouped by stock sales/purchases and mergers.
Acquiring company can decide which assets to purchase and which liabilities to assume. Can often take a while to be consummated, but the target company’s shareholders may have negative tax implications related to the sale (being taxed at the company level and on the distribution of net proceeds to shareholders). Third party agreements need to be resolved, particularly agreements that have provisions prohibiting assignment. This could slow down the process or even derail the process if acquiring company or target company is concerned about disclosing potential transaction. Some states require board/shareholder approval for sale of all or substantially all assets in the company. Also may trigger notice requirement to creditors in some states.
Acquiring company buys some or all assets from target company and assumes some or all of target company’s liabilities
Can take a while to close, plus potential adverse tax implications
Third party consent for contracts, leases, permits, etc.
Board/shareholder approval for sale of assets
http://www.gfmi.com/asset-liability-management/
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Equity Purchase
Stock Purchase or Merger
Generally more favorable to target company shareholders than asset purchase
Can be closed relatively quickly because need for 3rd party consent is reduced
Extensive due diligence is required to ensure acquiring company is aware of all liabilities
Stock Purchase
Acquiring company agrees to buy outstanding shares of target company
Agreement is typically between acquiring company and shareholders of target company, but target company is often party to stock purchase agreement
Unanimous shareholder approval required or merger is necessary for remaining stock interests
Merger
Image from: https://pixabay.com
- Transaction that combines two separate businesses into one
- Requires approval from board of directors of both companies, and typically approval of majority shareholders
- Types of mergers
Forward: target merges into acquiring company
Forward triangular: target company merges into a subsidiary of acquiring company
Reverse triangular: a subsidiary of acquiring company merges into target
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The Merger Process
Preliminary agreements
Confidentiality, exclusivity
Due diligence
Letter of intent / Term Sheet
Specify which terms are binding
Merger agreement
Public Announcement
Summary
Business combinations take two general forms: asset purchase or equity purchase
Equity purchases consist of stock purchases or mergers
Preliminary agreements, due diligence, letter of intent / term sheet are important steps for any business combination
Seek professional legal advice before pursuing a business combination
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