As a small business owner, you might want to build a business that others want to buy. On the other hand, you might want to acquire other companies to help you grow. That’s why it’s important to learn something about mergers and acquisitions (M&A) deals. We’ve put together this quick primer on mergers and acquisitions to give you an idea of what’s involved in case you ever want to sell your company, buy a company, or merge with another company.
Simply put, the term mergers and acquisitions refers to selling and purchasing a business. Mergers and acquisitions are different transactions even if the terms are often inextricably linked.
Merger refers to the process through which two companies become a new entity. Acquisition refers to the process of one company purchasing another.
Technically speaking, any company can be bought and sold. The difference lies in how easy or hard it is to transfer ownership interest in the business. For example, publicly traded C corporations are the most commonly acquired companies because of their stock structure. The stocks of C corporations may be freely purchased and sold. Shares traded on the open market are easier to objectively value. Additionally, a publicly held C corporation’s stock may be less expensive than the stock of other corporate forms.
Conversely, closely held corporations (those in which there are only a few shareholders, such as family-owned businesses) and limited liability companies (LLCs) aren’t as freely available because their Articles of Incorporation or Organization govern how they are bought and sold. A closely held corporation can be expensive and difficult to value objectively compared to a company with publicly traded shares. Businesses classified as S corporations can also be difficult to buy and sell because regulatory concerns may interfere with the merger or acquisition process. That doesn’t mean you cannot sell your LLC or S corporation. You just have to work a little harder in negotiating the sale.
Whatever you have in mind for the future of your business, ZenBusiness’s wide range of business services can help you keep your business in prime shape, so you’ll be ready to take advantage of any M&A opportunities that may come your way.
Merger and Acquisition Methods
Now that you know a little bit about M&A deals, let’s take a look at how these deals get done.
The parties negotiating an M&A transaction rely on one of three methods to complete the deal:
- The acquiring company purchases the target company’s assets;
- The acquiring company purchases the stock of the target company; or
- The two entities merge directly or indirectly with one another.
The methodology of the transaction depends on several factors. The parties involved must weigh various considerations to determine the best course of action.
When negotiating an M&A transaction, consider accounting for the following factors:
- Commercial implications
- Legal and tax implications
- Third-party and corporate consent required to complete the transaction
- The complexity of the transaction
- The timeframe in which the transaction must close
The parties to the transaction won’t weigh each factor equally. The specific posture of the companies involved in the transaction dictates which factors weigh more heavily than others. The presence of outside factors such as the ability to acquire financing also plays a significant role in closing an M&A transaction.
In other words, there’s a lot to think about when you are considering merging with or acquiring another company.
Taking a closer look at asset acquisition
When you started your small business, you probably never thought about where it could go. Sure, you wanted it to be profitable, but few people could imagine growing their company to the point where they have to decide whether to buy another company or sell their own.
Larger corporations purchase smaller companies for a multitude of reasons. The target company could market itself for purchase because of venture capital considerations, for example. Additionally, the company desiring to acquire the target company could be motivated to add to its own value for its shareholders by acquiring a new product line or gaining an edge over a competitor.
Acquiring a company instead of merging has its advantages and disadvantages. Both sides must consider each when deciding whether an asset acquisition is a proper transaction. From the purchaser’s perspective, the acquiring company can identify the assets it wants to purchase as well as the liabilities it’s willing to assume.
The purchaser must weigh the risk against the benefits associated with acquiring a target company. One company might be too risky to acquire because of litigation liability, excessive debt, or other contingencies. However, another target might be worth the risk to acquire because the assets have more upside than liabilities.
The level of risk involved in an asset acquisition requires both sides to negotiate in good faith. Additionally, each side must perform its due diligence. As a result, the parties must observe more formalities when acquiring assets than with a merger or stock acquisition. Moreover, every identified asset and liability can involve a separate transaction, each of which may have tax implications.
Buying and selling the assets of an LLC could be difficult because asset acquisition typically requires the unanimous consent of all members of the LLC. But you can plan for a future M&A deal by establishing a robust operating agreement when you start your business.
Unlike with LLCs, acquiring assets of a C corporation doesn’t typically require the assent of every shareholder. But as with an LLC, taking steps to plan for the future when you first establish your corporation can be invaluable.
With a merger, two businesses merge and become a larger company. Mergers occur most commonly among publicly traded corporations. There are no prohibitions against mergers of closely held corporations. However, the shareholders of both companies typically must approve a merger.
Companies merge to take advantage of the positive synergy created by combining the corporate entities into a single entity. New management and the potential to increase stockholder value are often the positive outcomes of mergers. However, the Securities and Exchange Commission (SEC), among other regulatory agencies, requires greater formality and transparency in the transaction. The scrutiny from federal and state regulators could reduce the benefits of the merger, assuming they approve the deal.
Small companies can merge and become one company more easily than others. Remember to think ahead about what the new management structure will look like and how the new business will operate.
Privately held companies typically acquire stock when purchasing another company rather than purchasing specific assets and liabilities. Closely held companies have fewer stockholders. Therefore, the parties can negotiate at arm’s length to close the transaction. Also, the relatively small number of shareholders may allow the buyer to purchase shares in the corporation more easily than with a public company. The shareholders must approve the deal, but the vote doesn’t generally need to be unanimous.
Significant risks accompany stock purchases of closely held companies. The purchaser must perform due diligence. However, discovering all liabilities is more difficult with closely held companies than with publicly traded companies. Therefore, the acquiring company might unwittingly acquire unknown or undisclosed liabilities. Publicly traded companies have greater transparency due to SEC filing requirements. Consequently, their assets and liabilities are more readily identifiable.
Profitable businesses often become attractive targets for mergers and acquisitions. M&A deals are intricate and implicate numerous legal, tax, financial, regulatory, and intellectual property issues. The process can be overwhelming. ZenBusiness provides services such as Worry Free Compliance, ZB money, and banking resolution, or you can take advantage of our full-service plans. ZenBusiness can help you with many aspects of running your business, so you can be prepared for any opportunities that come your way. At ZenBusiness, we are here to help you grow.
Mergers and Acquisitions FAQs
- What are the three types of mergers?
Companies combine in three ways. First, two companies could combine into one to create a new entity. Alternatively, a larger company could purchase another company’s stock. Finally, one company could acquire the assets and liabilities of a smaller company.
- What’s the difference between a merger and an acquisition?
The primary difference between mergers and acquisitions lies in the nature of the transaction. A merger combines two or more companies into one larger entity. A larger corporation purchases the assets and liabilities or acquires the stock of a smaller entity in an acquisition.
- Do I need a lawyer for a merger or acquisition?
Having a lawyer represent you during a merger or acquisition is a wise decision. An experienced lawyer could help you identify potential legal issues, explain your rights and obligations, and help you overcome legal hurdles associated with a merger or acquisition. Additionally, a skilled attorney can assist you in negotiating and partnering with other professionals such as accountants and tax professionals to complete the transaction and protect your interests.
The content on this page is for informational purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional in your state.