Sometimes when your company grows, it is strategic to either merge part of your company with another or acquire a part of another company. Below are considerations from both points of view.
Important Terms and Conditions for the Seller when Selling a Division of Your Company
In order to increase the certainty of closing, Seller wants as few conditions as possible. Important terms and conditions include:
Representations and Warranties
Seller will want Buyer to represent and warrant that Buyer is a company in good standing and that it will conduct timely due diligence in good faith.
Seller will want to narrow the scope of all representations and warranties given to Buyer. To enhance the certainty of closing, Seller will want to measure the accuracy of representations and warranties at closing. Such representations and warranties should be limited in their duration of survival and be subject to “materially or material adverse effect qualification.”
Buyer’s delivery of the full payment price, transfer fee taxes, and other fees as appropriate.
Breach and Damages
Limited remedies that exclude any punitive or consequential damages. Seller should put a cap on any potential damages.
Pre-closing consent for third-party contracts that prohibit assignment. The deal may also need to be contingent on board or shareholder approval.
Transfer of Staff
Termination of employment contracts if applicable. Note that such termination may result in the employee being entitled to a severance package
Seller will not want to include a Buyer financing contingency.
Practical Tips for the Seller when Selling a Division of Your Company
Planning will be a key component of the successful sale of a company division. The plan should: define the sale, define the sale priorities, identify key players, develop a preliminary timeline, and anticipate potential issues. Ultimately, there should be a formal process with very clear communication.
Even before a potential buyer is identified Seller must carefully determine exactly what will be sold. Then, Seller must evaluate the strengths and weaknesses of the division so that the greatest value can be communicated to the prospective buyer. Seller will then need to develop a selling strategy that includes the deal structure, non-negotiables, and preferred transaction timing. The strategy should include a data management plan that includes information disclosure, data preparation, privacy restrictions, and data room structure and management.
The plan should create an interim process to ensure sustained quality throughout the sale and transition. This may include the need to plan for how to deal with instability that may result from the announcement of the potential sale.
This process will be observed very closely by both external stakeholders and employees so there should be a carefully planned communication program. It will be important to understand how the sale of the division will affect employees and it will be important to keep employees of the division informed and motivated. Key employees should be retained, motivated and rewarded for continuing to work hard and supporting the transition. Additionally, all external Seller and Buyer communications must be aligned.
Determine what will be included in the sale: business equipment, inventory, trademarks, trade names, good will, etc. Makes sure agreement conveys all assets required to be divested and contains no inconsistent provisions. It will be important for Seller to have a good grasp on any financial information related to the division both in terms of the value given to Buyer as well as the value being lost to Seller.
Seller must create a transition team that will be in charge of executing the sale and working with: lawyers, accountants, bankers, IT team, and HR. The transaction team must be well managed with clearly defined roles and clear communication on what needs to be done, who needs to do it, and when it should be done. It will be important for Seller to choose the right leader. The leader should be an excellent communicator as well as have solid M&A experience.
Important Terms and Conditions for the Buyer when Acquiring a Division of Another Company
Buyer has an interest in having more terms and conditions as Buyer will not want to be legally obligated to commit the funds to close until it is comfortable that the things it views as most important are in place. Important terms and conditions include:
Representations and Warranties
Representations and warranties should be accurate upon signing rather than closing. Such representations and warranties shall be requested to be “accurate in all respects.” Buyer will also want to expand the survival period with some representations and warranties being unlimited.
Some representations and warranties to include may include: Seller will continue to operate the division as normal, Seller will provide access and materials to Buyer during due diligence period, Seller has legal right to the transaction and is operating the business in a legal manner, there are no outstanding lawsuits, Seller will deliver possession upon purchase by Buyer.
Transfer of Assets
Assets used for or resulting from the division must be made available and transferred to Buyer.
Transfer of Staff
Successful execution of employment agreements with key-seller employees. Buyer will also want to reduce any labor related contingencies that may damage Buyer’s interest in the transfer.
Very high stockholder approval percentage to ensure that the buyer has support moving forward. Additionally, Buyer may find it important to condition the purchase on the transfer of all third party agreements, even those with non-assignment provisions, to help ensure the business will continue smoothly after the transfer. These contracts could include customer contracts, supply contracts, and leases.
Breach and Damages
No limit on remedies with broad damages that include consequential damages and diminution in value. Buyer will also want a sandbag provision and low cap.
Free of Legal Obligations
Seller proving that there are no judgments, restrains, liabilities, or litigation that may interfere with its ownership rights of the division.
Receipt and approval of a pro forma financial statement.
No Business change
No material adverse change occurring in the business until closing.
Attainment of financing.
Transfer of documents
Transfer of license agreements and permits for the business.
If applicable, government approval of the transaction.
Practical Tips for the Buyer when Acquiring a Division of Another Company
Prior to closing, Buyers main objective will be to obtain information and evaluate Sellers responses.
Buyer will first need to identify strategic goals and key objectives of the purchase of the division. An acquisition team should be put together to help with the due diligence of the purchase. This team should include: banker, accountant, and attorney. Buyer will then want to create an integration plan. The plan should be looked over and refined by operations, tax, finance, legal, human resources, and information systems.
Next, Buyer will need to obtain information about the potential division to be purchased. Buyer will want to look into such things as: revenue, taxes, tangible assets, intangible assets, business operations, sales records, employees, and transfer pricing policies. It will be important for Buyer to identify whether the division would be a good fit.
It will be very important for Buyer to have employees, customers, and clients all on Buyers side. Therefore, Buyer should spend time talking with these individuals about Buyers plans and ideas.