Mergers & Acquisitions: Basics for Small Business

Business people meeting at a table

Mergers and acquisitions (M&A) is a general legal term that refers to the sale and purchase of a business or the consolidation of two businesses. A common misconception is that mergers and acquisitions apply only to large, multinational corporations. In fact, any sized business can take part in a merger or acquisition to reap substantial benefits by combining companies, increasing market share, or reducing the cost of business operations. Regardless of the size of the transaction, working with an experienced business lawyer from the beginning of the transaction to the end is crucial for your business.

Why Do Businesses Merge With or Acquire Other Businesses?

In today’s economic climate, there are massive opportunities to purchase other businesses or to merge companies. If you are a small business owner considering a merger or acquisition, you need a basic understanding of M&A law and how an experienced business lawyer can help.

Companies compete with one in the same industry and across business sectors. To stay on top, businesses should be on the lookout for opportunities to grow, to move into a complimentary market, to reduce operating expenses, or even to find new talent. Merging with or acquiring a competitor or complementary organization is an opportunity to restructure a business while allowing both companies to remain competitive or gain a competitive advantage.

What Is the Difference Between a Merger and an Acquisition?

Mergers and acquisitions are different ways to combine businesses into a single, new entity.

In a merger, the owners of two or more businesses agree to combine their companies to extend their reach, gain market share, and reduce the costs of operations. Companies seeking a merger are often, but not always, of similar size and earnings. These deals are often called a “merger of equals.” Once the merger is complete, the two businesses cease to exist as individual entities and become a new company.

Acquisitions are typically structured as purchases. A more profitable company decides to purchase another company’s  assets or ownership units to gain control.

Mergers and acquisitions can occur for any number of reasons, including growing income and market share, to survive a tough market, or to take over competitors.

If your company is considering merging with another business, buying another company, or is being bought out, you should work with an experienced M&A attorney. 

How Can a Business Acquisition Attorney Help?

To successfully navigate a merger or acquisition you need a lawyer who will identify your business objectives and the relevant legal issues, create a roadmap to take your business through the deal, advise on negotiating tactics and strategies, conduct due diligence, , and ultimately make the transaction happen. Mergers and acquisitions often present complex business, legal, tax, employment, intellectual property, and liability issues.  An M&A lawyer will help you address those aspects within the legal realm, while also helping you work with other advisors, including tax advisors, accountants, and financial advisors to select the best deal structure and negotiate terms in your favor.  A poorly negotiated or otherwise incomplete deal can lead to significant financial risks for both companies. 

An experienced M&A lawyer will assist with negotiations, ensure that the deal is properly structured and, if there are any issues that need to go to court after the merger or acquisition, be available to assist with or represent you in any ensuing litigation

Valuing the Business

If your business is considering acquiring or merging with another business, you should consider starting with a business valuation. There are multiple ways to value a business, and you need to understand the method used to appraise the business you are considering purchasing or merging with. To establish the value of the business being acquired or, in the case of a merger, the values of the companies being merged, it is wise to work with a qualified business appraiser. Once you know how much the other business is worth, you can better evaluate whether the proposed terms are fair.  While an M&A lawyer will not prepare the valuation, you should talk to a M&A lawyer prior to engaging an appraiser as there are a number of options and considerations to take into account.

Advice on Financing a Merger or Acquisition

While some mergers or acquisitions are cash transactions, many are not. There are many ways to finance a merger or acquisition, and an experienced M&A lawyer will offer advice on the pros and cons of different ways of funding the transaction.

Negotiating Terms of the Merger or Acquisition

An M&A lawyer will help by assisting with negotiating the terms of the merger or acquisition and preparing the necessary documents to make the transaction happen, or reviewing and commenting on the documents if the other side is taking the lead. Our M&A lawyers add value to the transaction by helping you understand what may be available in an M&A deal and negotiating the best deal for our clients.

Depending on the nature and terms of a merger or acquisition, such can take days (for very simple transactions) to months or more to complete. M&A transactions are often complex, multifaceted deals that present challenging legal issues. They can move fast and be contentious. An effective M&A lawyer will understand the business realities of the deal as well as the inner workings of the acquisition agreement.

Preparing the Merger or Acquisition Agreement

Once you have decided to acquire or merge with another business, you need an agreement that will account for the assets and liabilities of the business being purchased or, in the case of a merger, both businesses. In the case of corporations, the agreement will address the purchase of stock; otherwise, it will address the purchase of assets. The agreement should identify any inventory involved in the purchase and sale of the business, as well as how the business will be managed until the sale is complete.

When the merger or acquisition has been finalized, you may be closing down the newly acquired business. In the case of a merger, you will technically be closing both businesses and starting a new one. This process typically involves creating a new business entity, transferring licenses and permits, and obtaining new tax IDs.

Avoid the Risks of a Merger or Acquisition

Mergers and acquisitions carry risks, even when both companies are honestly motivated and want to improve both companies’ standing in the market. Stories of massive business losses after an unsuccessful merger or acquisition are legion. But an experienced M&A lawyer can help you avoid the pitfalls of a merger or acquisition.

Sometimes mergers or acquisitions fail because the cultures of the two companies are incompatible. Other times, combining the businesses achieves the desired financial goals but creates other problems.

At Fremstad Law, our experienced M&A attorneys will help by minimizing risk at every stage of the transaction. North Dakota and Minnesota lawyers  Joel Fremstad, James Teigland, Mark Western, Brandt Doerr, and Nick Thornton are here to help move you forward. 

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