The anatomy of an M&A transaction

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September 9, 2024

Dan Gordon, CPA

Dan Gordon, CPA

Merger and acquisition (M&A) transactions can be complex. Sellers often receive many opinions — but if those opinions aren’t from qualified professionals, that advice can be drastically wrong. It could even end up costing a seller a lot of money via purchase price, payouts and taxes.

A good lawyer or certified public accountant (CPA) who specializes in transactional and tax structuring might be a sound start. But before contacting a professional, take a look at the purchase and sale process so you’re familiar with it.

Here’s how it works:

  • Non-disclosure agreement (NDA). Business owners exploring the potential sale of their business should protect their confidential information by having NDAs put in place with any parties whose confidential information will be shared.
  • Deep dive. To ready your business for sale, conduct a deep dive that examines what buyers want to know, such as financial and core business operations and policies. A competent broker, CPA or lawyer can help flesh this out.
  • Requested information. To present your company to potential buyers, put your best foot forward by preparing a marketing document or a confidential information memorandum (CIM). This is the key marketing and executive summary that is provided to potential buyers once they have executed an NDA. This document showcases your business to potential buyers.
  • Short list of buyers. There are many buyers looking for the right company. The right company may be different depending on the buyer’s focus — commercial routes vs. residential routes vs. certain geographies, for example. Once the field of interested and qualified buyers is narrowed, an NDA needs to be executed between the seller and all potential buyers. Upon return of the executed NDAs, the CIM should be shared with potential buyers so they can perform their own analysis and submit a letter of intent.
  • Letter of intent (LOI). The LOI summarizes the offer in terms of price, terms, representations and warranties. The LOI usually is non-binding, with the exception of the confidentiality provisions and an agreed-upon period of exclusivity. This is where the buyer will expend significant expense to consummate the transaction; therefore, the seller will not continue to market the company until either a deal is finalized or both parties decide a deal will not be done.
  • Due diligence. During the period of exclusivity, the buyer will conduct a process known as due diligence to:
    • Determine or confirm the value of the assets.
    • Confirm the seller has the proper title to the assets.
    • Fully understand any liabilities the buyer is assuming.
    • Uncover any impediments to the transfer of the assets or the transaction in general.
    • Uncover any impediments to the future operation of the assets or line of business.
    • Plan how to integrate the assets into the buyer’s business.
    • Understand and confirm the information listed on the disclosure schedules.
  • Purchase agreement. Once due diligence is completed, the buyer will draft the purchase agreement. Most buyers have distinctive purchase agreements with very different clauses, so as the seller you need to be careful — especially regarding indemnities, representations, warranties and covenants. The devil is always in the details.

Inclusive in the purchase agreement are disclosure schedules, which are details drawn from the due diligence phase such as:

  • A list of assets purchased.
  • Assets excluded from purchase.
  • Liabilities assumed or not being assumed.
  • A list of employees and their compensation details.
  • Customer lists.
  • A list of insurance policies.
  • Claims and lawsuits.

In addition, there are several ancillary agreements attached as exhibits to the purchase agreement. Examples include employment and independent contractor agreements; bills of sale; assignment and assumption agreements; noncompete agreements and promissory notes.

The closing. Finally, the closing date for the transaction is scheduled and all contract documents are signed and held in escrow until funds are delivered via bank wire. Sometimes, the purchase agreement may get executed and the deal will close on the same day. Other times, the purchase agreement is signed first and then the closing occurs after certain conditions have been met, such as landlord consent, an employee meeting or human resources issues.

The closing itself is usually a short 10- to 15-minute meeting, either on-site or by phone to confirm all signatures and conditions are completed. Finally, a “congrats” is given to all as the deal is done with receipt of funds confirmed by the seller.

About the Author

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Dan Gordon, CPA, owns PCO Bookkeepers & M&A Specialists, an accounting and exit planning firm that caters to pest management professionals throughout the United States. He can be reached at dan@pcobookkeepers.com.

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