8 Key Stages of M & A Transactions

There are two desired exits for a company: to go public or be acquired. While companies often hope for a public exit, it is much more likely that, when the time comes, they will go through a merger or acquisition transaction, or “M&A” transaction. This article will provide an overview of eight key stages that typically occur as a company goes through a M&A transaction.

Louis Lehot

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1. Preliminary conversations with potential buyers

Typically, transactions kick off as informal discussions between the company and one or more potential buyers. It may be helpful to enlist a banker to run an organized process for price discovery based on a well-drafted information memorandum, and to organize outreach to potential buyers that may be interested in your company, as well as to help guide these preliminary conversations to a letter of intent. The primary focus of these preliminary conversations is price and value exploration, along with fit and feasibility. Conversations regarding deal structure are to be had at a later stage of the transaction.

2. Execution of non-disclosure and non-solicit agreements with potential buyers

Before a potential buyer will agree to move forward with a transaction, you will be required to provide sensitive or confidential information. To protect this information, it is best to execute a non-disclosure agreement with any potential buyers. This will ensure that a buyer cannot walk away from the deal and then use confidential information provided during the discussions for their benefit. A non-solicit agreement should also be executed if you want to prevent buyers from recruiting members of your business team.

3. Receipt of a letter of intent from the buyer

When a potential buyer has decided that they want to continue with the transaction, they will provide the target with a letter of intent or term sheet to outline their proposed terms for the transaction. This acts as a framework for terms regarding the structure of the transaction, the purchase price, the structure of the earnout, indemnification, and any other terms associated with the closing of the deal. The buyer may choose to include an exclusivity provision in their letter of intent to prevent the target from engaging with other potential buyers. It is critical that a thorough legal review is performed by the target company’s legal team at this stage of the transaction, as once the term sheet is signed by the seller, the leverage can quickly shift to the buyer, and it will be more difficult to extract concessions.

4. Pre-signing period

  • Negotiate the definitive document

The definitive document is the formal document outlining all terms and conditions of the deal. Any terms proposed in the letter of intent may be renegotiated at this time if required. The final document will be negotiated and agreed upon by the buyer, target, and their respective legal teams. Negotiating the terms of the definitive document often takes several weeks.

  • Complete due diligence

The target will be required to provide any documents outlined by the buyer in a due diligence request list. These documents will cover matters such as corporate formation, financing, intellectual property, debt, commercial contracts, regulatory matters, licenses, and employees and consultants. At this stage, the buyer is concerned with circumstances that may impact the purchase price and result in additional terms and negotiations being required.

  • Populate disclosure schedules

Representations and warranties about the operation of the target will be outlined in the definitive document; this includes disclosure of matters pertaining to lawsuits or breaches of contract, if any. Disclosure schedules will qualify these representations and warranties and ensure that there is no misrepresentation and that the buyer does not have right to pursue an indemnification claim.

5. Signing of documents

Once the definitive document has been negotiated, finalized, and agreed upon, and any additional documents have been provided and considered, signing of the documents will occur. At this point, the deal may close if there are no additional closing terms to be satisfied.

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6. Pre-closing period

If there are additional closing terms that need to be satisfied following the signing of the definitive document, the target and buyer will prepare and present all outstanding deliverables. Terms that may be satisfied during this pre-closing period include government approvals, and third-party or employee agreements. The number of terms that remain to be satisfied following the definitive document signing will determine the length of this stage.

7. Closing the deal

When both parties have met all terms outlined in the definitive document and funds are exchanged, the deal is closed.

8. Post-closing period

Once the deal is closed, you can focus your attention on your future endeavors, paying taxes, creating an estate plan, and thanking all that were key to the success of the M&A transaction. At this point, the buyer will be responsible for full integration of your business.


How to Issue Securities: 5 Considerations

One of the first formal corporate actions to be taken following the formation of a corporation is issuing stock to the founders. Stock issuance to founders typically occurs during the formation process, though a company will continue to issue various securities through its growth and development. This article will outline five considerations to keep in mind as your company issues securities.

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1. Board Approval

Any security to be issued requires approval from the board of directors. Regardless of the type of security, whether common stock, preferred stock, stock options, warrants, or convertibles notes, it is necessary for the board of directors to provide either written consent or approval at a board meeting. Ensuring securities have board approval validates the issuance of the security and is a simple administrative task that prevents complications in the future.

2. Payment for the Security

In return for the security, the company must receive payment. This payment can be monetary, property, or a service. Monetary payment can be made by cash or check, or an agreement to forgo a debt payment owed by the company issuing the security. Property of value that can be used as payment includes equipment, technology, or intellectual property rights. If a service is being used as payment, it must have already been provided and not be a promise to provide a service in the future.

When deciding on a payment option for a security, it is important to consider any tax issues that may arise. It is best to consult with a tax attorney or accountant as they will be able to advise the best payment option for each security holder.

3. Required Documents

The documents required when issuing securities will be dependent on the type of security that’s being issued. Below are the documents required for commonly issued securities.

 Common stock

  • Board approval
  • Complete stock purchase agreement
  • If insufficient number of shares authorized, charter amendment, stockholder approval and other approvals

Stock options

  • Board approval
  • Independent third-party valuation
  • Stock plan
  • Option grant and complete option grant notice

Preferred stock

  • Board approval
  • Complete stock purchase agreement
  • Stockholder consent (watch for any class votes required)
  • Ancillary agreements

Ensure that all required documents are prepared, signed, secured, and easily accessible. This will allow diligence by future investors to proceed without issue during financing or sale of the company.

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4. Securities Filings

When issuing securities, a securities filing is often required to comply with state and federal securities laws. These laws require companies to fully disclose information regarding the company and associated investment risks. It is typical for companies to seek exemptions to these securities laws so that they do not have to provide full disclosure. Exemptions can be applied to the following situations:

  • The number of securities being issued is small, and they are offered to a discrete number of potential investors
  • Potential investors are already involved with the company to some degree so they are aware of the risks that may be associated with the investment
  • Potential investors that have previous experience with similar investments, a high net worth, or a high income will be seen as able to bear the risk of the investment

Even if an exemption is employed, a securities filing may still be required to comply with the law. It is important to consult with your legal team when submitting any securities filings to ensure that all necessary laws are being complied with. Maintaining accurate records of all filings will also permit diligence by investors during any future transactions.

5. Stock Certificates

The final thing to consider when issuing stock is whether to issue a paper or electronic stock certificate. Public companies only issue electronic certificates, however private companies may choose whether a paper or electronic certificate would be more suitable. Increasingly, private companies are working with cloud-enabled vendors to issue electronic certificates.