By most estimates, 50 percent to 75 percent of all mergers and acquisitions (M&As) are unsuccessful. To strike the right tone with investors, shareholders, management and employees, successful M&As require complex due diligence from attorneys who know what to look for in a deal and can deliver industry-specific expertise.
To establish M&A best practices, COMMERCE asked managing partners from New Jersey’s top law firms to offer their insights on the keys to M&A success. The following thought leaders participated:
● Archer & Greiner P.C. Chairman James H. Carll, Esq. ● Cole, Schotz, Meisel, Forman & Leonard, PA Co-Managing Shareholder Samuel Weiner, Esq. ● Connell Foley LLP Managing Partner Michael X. McBride, Esq. ● DeCotiis, FitzPatrick & Cole, LLP Managing Partner Joseph DeCotiis, Esq. ● Genova Burns Giantomasi Webster LLC Managing Partner Brian W. Kronick, Esq. ● Gibbons P.C. Chairman and Managing Director Patrick C. Dunican Jr., Esq. ● Lindabury, McCormick, Estabrook & Cooper, P.C. President John R. Blasi, Esq. ● McCarter & English LLP Managing Partner Stephen M. Vajtay, Jr., Esq. ● Nachman, Phulwani, Zimovcak (NPZ) Law Group Managing Attorney David H. Nachman, Esq. ● Norris McLaughlin & Marcus, P.A. Chairman G. Robert Marcus, Esq. ● Riker, Danzig, Scherer, Hyland & Perretti LLP Managing Partner Glenn A. Clark, Esq. ● Sills Cummis & Gross P.C. Managing Partner R. Max Crane, Esq. ● Wolff & Samson PC Management Committee Vice Chair Larry Smith, Esq.
The most important advice to both a buyer and seller of a business is to engage in full due diligence. It is critical that a buyer has a full and complete understanding of the target—legal, regulatory, operational, the environment that it works in, etc. Too many deals become a disaster over issues that could have been understood in advance of closing. Likewise, a seller of a business needs to understand and know the buyer. If the owner is to stay on as an executive, how does the buyer treat employees in this situation? If the seller is to take back a portion of the purchase price, what is the financial strength of the buyer? If there are to be escrows, what is the history of the buyer in pursuing indemnification claims? Buying and selling a business is definitely an area where what you don’t know can hurt and what you do know can save pain and expense in the future.
My advice to a prospective purchaser is to do a tremendous amount of due diligence on the business. To the extent feasible, there should be thorough interviews with the owners, key employees and important customers and suppliers. It is critical that the buyer have a top-notch accountant who can properly analyze the financial statements, tax returns and books and records of the seller. There should be a detailed projection of the profitability of the business for 3 years to 5 years that includes the anticipated infusion of monies into the business and the source of those funds. The legal and accounting team will be very important in advising the structure of the entity making the acquisition and how it should be owned. The attorney must point out all potential liability exposures and provide protections against them. On the flip side, a seller must carefully screen the buyer to make sure it is bona fide and can make good on the purchase price, whether it be an all-cash deal or with a portion being paid over time. There must be a confidentiality agreement to ensure that the possibility of sale is not made public, and that the prospective buyer does not capitalize on the information disclosed. If the purchase price is being deferred, then there must be a host of safeguards to ensure payment or a “recoupment” of the business. The purchaser must be careful to not make any representations which could give rise to liability after the closing, which can be financially devastating and lead to very unpleasant protracted litigation—which is not rare.
An owner must consider why he or she is buying or selling a company. From the buyer’s perspective, the acquisition may be an opportunity to expand into new markets, acquire products that fit with the buyer’s strategic plans, improve operating margins or acquire talented people, including possible successors to lead the company in the future. The buyer needs to understand the seller’s intentions. Is there no clear successor plan? Has the future for the business changed? Is the competition for its products or services too difficult? Is the seller getting out of a bad business? From the seller’s perspective, an acquisition or merger may be an opportunity to continue the legacy of the business, to provide a better opportunity for key employees, to improve margins or to run certain businesses more efficiently and profitably. Again, the seller must understand why the buyer is interested. Is the buyer interested in expanding market share, expanding its products and services, protecting key employees or just interested in the cash flow? Some details to consider include whether to structure the transaction as an asset or stock sale (in a stock sale the buyer generally inherits the existing liabilities); the scope of representations, warranties and indemnities, environmental issues and litigation pending or threatened; agreements for key employees; real estate; non-competition agreements; intellectual property; and confidentiality. Finally, keep the lawyers out of the room until the key business points are agreed upon. The lawyers may try to win too many legal points and could lose focus on the business reasons for the deal. The last factor to consider is whether the merger or purchase will be successful. Maintaining the culture of the acquired company and its reputation in the industry will go a long way in incentivizing key employees to make the merger successful. Bob Iger of Disney bought Pixar in 2006 and Marvel Entertainment in 2009 and maintained the leadership and culture of each company. Both acquisitions were successful.
As the managing partner of a law firm that has acquired competitors, culture is always my first priority. Whether it’s a merger or an acquisition, it’s critical to establish that the cultures of the two firms are compatible. If the culture of a firm you acquire matches your company’s goals or inspires your company to correct inefficiencies—it’s the right fit. A merger with a company that maintains a poor or diametric workplace culture, may decrease productivity or morale. If you fail to take a hard look at another company’s culture, a transaction that may increase revenue in the short term could end up affecting your company’s long-term objectives. Our firm maintains a mergers and acquisitions practice, and we often counsel companies to plan for the unexpected in these matters. There can be disputes among partners over share allocations, terms of agreement and a host of other issues. Transactions can get complex to the point where private letter rulings from the Internal Revenue Service become necessary. For these reasons, it makes sense to engage legal and accounting professionals very early in the process to analyze and recommend strategies to control costs and protect your business.
My advice to businesses looking to acquire a company or be acquired in a merger is to look for the right fit. Likewise, the most important thing an owner should consider before buying or selling a business is synergy. Pick an industry you know and carefully evaluate potential candidates that mesh with what you do well, and with your personal and business philosophy. The company’s products or services should be related or complimentary to what your existing business already markets and sells, and the merger or acquisition should bring efficiencies and result in improved cash flow to fuel additional projects. Look at the company’s identity and reputation, consider the company’s culture, and carefully evaluate the risks and costs. Once you’ve begun your due diligence, don’t limit yourself to review of operations and financial statements. Talk to employees, customers and suppliers, and make sure you bring in an attorney who is acquainted with both M&A generally, and with your industry, specifically. Finding a good candidate for a merger can take a lot of time, energy and money, but it can be worth the investment and a necessary way to grow in a fastpaced business world.
First, make sure the deal you are considering supports your strategic business objectives. To do so, you need to understand your core business that makes your merger desirable, and then focus your advisors, due diligence and negotiations on the core business. Each deal will have a unique, central asset, whether it involves an industrial facility (with the potential for environmental problems), know-how for a new technology, a synergistic customer list or strong inventory. Next, make sure you develop a strong rapport with the principals on the other side of the deal. You will need such a relationship when difficult issues arise during the negotiation of the sale agreement. Structure a deal team (lawyers, accountants and other trusted advisors) that will strengthen your rapport and who understand the core business. At the end of the day, as the seller, you want to achieve finality in the sale, and do not want to have to give back any of the bargained- for consideration. As the buyer, you want to come out of the deal focused on successfully integrating the new assets to meet the strategic objective for which you got into the deal in the first place. Lastly, if the value is not there in doing the deal, don’t be afraid to walk away.
Obviously buyers and sellers of businesses tend to focus on their respective financial performance (for sound and obvious reasons). But in evaluating a business—whether to buy or sell—a frequently overlooked or undervalued factor is whether the cultures of the two entities will mesh. Just because key performers of a business are performing well in their current environment, doesn’t guarantee they will do the same in a different culture and under different circumstances. It is important that both parties give proper attention to this factor as they evaluate their opportunities. Our second piece of advice is for businesses looking to be acquired. We suggest that early on (before actively seeking out acquisition opportunities) the potential seller should take the opportunity to have qualified attorneys and accountants review the seller company’s contracts and internal operations arrangements to determine if there are any legal or accounting issues that should be resolved. Often these issues are relatively minor and can be corrected without a lot of trouble. But if these various minor issues are instead left to be uncovered in the due diligence process by an interested acquirer, they can set a tone that causes a prospective acquirer to become uncomfortable (and start to wonder if there are other issues with the seller that have not yet come to light).
As a general rule, buyers and sellers have fundamentally different (and often opposing) tax concerns in the purchase and sale of a business. Buyers generally want to assure that the purchase price being delivered serves to increase the tax basis of the depreciable assets they are purchasing (including intangibles and goodwill) in a way that maximizes post-closing amortization. Sellers, in turn, are interested in structuring the sale in a manner that will minimize the federal and state taxes that will be payable on the proceeds, with individual sellers having a particular desire to recognize any gains at the favorable rates available on the disposition of long-term capital assets. In the wake of the American Taxpayer Relief Act, sellers have an additional concern, namely, the new 3.8 percent surtax on net investment income which can include capital gains. Careful pre-transaction planning can greatly reduce the tax cost of a deal for the sellers and can similarly assure the buyer the best possible opening balance sheet for its new business.
First, know your market, the players in that market and how you fit in. As an acquirer, thoroughly understand where the target fits in the market, who its customers and suppliers are, and identify any synergy with your business. Is the target a strategic acquisition or purely a money play? Would the acquisition eliminate a competitor, expand market share, create economies of scale, etc.? The acquirer must know their goals so that the deal can be structured properly. As a target, make sure that your records, finances and management are in good order. We often find these internal issues have been neglected. For example, the target may be conducting business in a number of states where it is not qualified to do so. This can raise significant tax issues which may require the filing of multiple delinquent state tax returns. The target may also have key employees with significant customer relationships but no restrictions on competition. The acquirer will not want to pay the true value for the target knowing that there is a significant risk that its key employees can take those customers to a competitor. The list can go on and on, but those are a few areas of front-end concern.
As a business immigration law firm, we consult with clients who are in the process of buying or selling companies regularly. There are a few immigration issues to consider in any acquisition context. First, are there any non-immigrants (foreign national workers with temporary work visas) on the payroll? If so, a determination needs to be made as to whether or not the corporate structure will change in such a way that it would require the H, L or E visa to be amended by the U.S. Department of Homeland Security, Citizenship and Immigration Service (USCIS). Next, we need to determine whether there are any foreign national employees on the payroll of the company for which the organization may be sponsoring the green card. If the company being acquired is sponsoring the green card, then the acquisition may require that new information be provided to the governmental authorities. An analysis needs to be made as to what part of the PERM process has been reached to determine how the acquisition may change the Labor Certification Process or whether the USCIS needs to be notified of the change in corporate ownership. Finally, and most importantly, our office is required to review the I-9 Employment Eligibility Verification Forms in any buy/sell scenario. The acquiring company has the right to either accept the I-9 Forms of the predecessor organization and to be bound by any deficiencies. Alternatively, the acquiring company can choose to do new I-9 Forms for all of the employees of the target company.
I would first question the owner why he or she is interested in merging. If you think bigger is better, it may not always be so. Will this new company be better than each of the two companies separately? Do you want to merge from a position of weakness or strength? If it’s from a position of weakness, I would caution against merging. There is always an acquirer and an acquiree; one side will be running the show. If your position is less robust than the other party’s, you will likely find yourself at a disadvantage in crafting the deal and accomplishing your objectives. Before discussions go too far, you will want to feel comfortable that the two cultures are a match, and that the core beliefs of each company are in harmony. Due diligence is key. At the very least, you want to be sure all financial statements on both sides are laid bare so that there are no surprises. In structuring the deal, a paramount goal should be to avoid debt. In addition, both parties need to agree early on a clear statement of intent relating to client service and employee continuity.
Keep your eye on the prize. Always know what your goal is. There are usually many ways to get there, but you will be sidetracked unless you are relentlessly focused on the end result. Prior to establishing your goal, ask yourself: Is this the right fit for each company or are there too many cultural variables? Once the deal is over, be patient. Successfully combining companies takes time. Obviously there are far too many issues to mention here, but some of the key issues to consider include type of sale— cash or stock; earn-outs and seller protections; stock options and other incentives; liabilities, financial and otherwise; taxes; indemnities; geographic footprint; employment issues; due diligence; intellectual property; approvals and consents, including Board of Directors, stockholders, lenders etc.; antitrust issues; and legal, accounting, banker and broker’s fees. As Augustus Caesar said, “Festina Lente”— Make haste slowly.”
Before pursuing an acquisition, or before putting itself up for sale, a company should have clearly articulated reasons for choosing that particular course of action. In the case of acquiring another company, the goals may be expansion into a new geographic region or product line, capitalizing on synergies between the acquirer and the target, or achieving a critical mass that will enable the company to pursue a wider range of customers. Regardless of the underlying reasons, the acquisition should be accretive to earnings and should not saddle the company with excessive debt, especially since the benefits of an acquisition are not always realized within the projected time frame. In deciding to sell a privately held company, an owner must consider the health of the business (including prospects for growth), the state of the industry of which the business is a part, succession issues, and the state of the debt and equity markets, which will bear upon the universe of potential purchasers and the sales price. The decision about whether to be a seller should not be clouded by emotional attachment to the business; achieving the requisite objectivity will likely require counsel from one or more third parties.