When a transaction opportunity presents itself, many small-business owners turn to their attorneys. But while their experts might be knowledgeable about general corporate matters, they might have little expertise in the various business, accounting, tax and legal matters that need to be addressed. The idea of seeking a mergers-and-acquisitions (M&A) attorney too often is ignored or deemed unnecessary for what’s thought to be a simple matter if a two- or three-page letter of intent (LOI) is drawn up between the two parties and that whatever contract has to be drawn up reflects the LOI points. Many times, no lawyer is consulted about what should be in the LOI. While this is common, it also can be a recipe for disaster. Instead, a seller and buyer should embrace and follow the following basic principles:
- M&A transactions have significant tax wrinkles and ramifications — such as selling stock versus business assets, for example.
- Lawyers don’t automatically have M&A expertise just because they handle other business contracts.
- Always have a fulsome LOI prepared by a lawyer.
- An LOI isn’t the last word on the deal; it’s a summary outline of certain terms.
- Be prepared for additional business, tax and legal points to be negotiated after the LOI.
- Don’t assume the purchase and sale (P&S) agreement is a standard contract with boilerplate language.
- Always read the P&S agreement and ask questions if any provisions are unclear.
- If you’re the buyer, seek the seller’s representations, warranties, covenants and indemnifications.
- If you’re the seller, offer the buyer limited representations, warranties, covenants and indemnifications.
Dan Gordon is a CPA in New Jersey and owns an accounting firm that caters to PMPs throughout the U.S. He facilitates several peer groups that help PMPs increase growth, profitability and accountability in their firms. Visit www.pcobookkeepers.com for information about his firm, PCO Bookkeepers. Gordon can be reached at email@example.com.