Blog Posts
Mergers and Acquisitions
M&A Nuggets: Take It Personally - It's Goodwill
A common quandary facing sellers taxed as C corporations is the double tax that will result from a sale structured as an asset purchase — one level of tax to the corporation on the sale of its assets and a second level of tax to the stockholders on distribution of the net proceeds from the sale. This double tax can equal close to 50% of the total purchase price. The best way to avoid the double tax is to convince the purchaser to engage in a stock sale. That, however, is not always possible. In that case, serious consideration should be given to whether a portion of the purchase price can be allocated to the personal goodwill of the seller’s owners, as opposed to company goodwill. Any part of the purchase price allocated to personal goodwill will be subject to one level of tax. An additional benefit to the seller is that amounts allocated to personal goodwill are subject to capital gains tax rates. From the purchaser’s viewpoint, it can deduct amounts attributed to personal goodwill over 15 years, which is the same result as with amounts allocated to company goodwill. Personal goodwill is the goodwill of the individual owner of the seller that results from the person’s unique expertise, reputation or relationship with vendors and/or customers. Personal goodwill does not exist in every business. Before agreeing to an allocation to personal goodwill, an analysis should be made to determine the likelihood that the allocation will withstand any challenge by the Internal Revenue Service. The most quoted personal goodwill legal case involved a distributor of ice cream products who sold part of his business to Häagen-Dazs. In that case, the court recognized that the most valuable asset of the business was the owner’s business relationships with the business’s customers; the success of the business depended entirely on the owner. Another important factor was that the owner did not have a non-compete agreement. The court held that the owner, not the company, sold his assets to Häagen-Dazs. If the factors identified by the court in the Häagen-Dazs case apply and personal goodwill exists, a seller can obtain a significant tax benefit. That would be a very nice dessert on top of the main event of the business sale.
April 16, 2026
M&A Nuggets
M&A Nuggets: Stop Signs
Contrary to popular belief, most business purchases do not succeed. That is not necessarily a bad thing, because occasionally the best deal is the deal that does not happen. To avoid closing a bad deal, the acquiror should be on the lookout for big red stop signs. Some stop signs are obvious, like material litigation, declining revenues, downward profits or a seller that engages in a particularly risky business. Some stop signs are not so obvious. These more subtle stop signs can spell disaster for a business combination. Examples include: a lack of symmetry in business culture between the purchaser and the seller the seller’s lack of proper recordkeeping, such as poor financial books and records, corporate documents or human resources files a seller who is unable to express a rational reason for sale a seller who appears recalcitrant in its position and/or somewhat aloof in the negotiation process Special attention should be paid to these last two items. Starting early in the process, the acquiror should ask a seller about its motivation to sell and its plans for devoting resources to the sale, and then track whether the seller’s actions follow its words. Otherwise, an acquiror could be negotiating with a seller who is not “all in,” wasting months of time and resources on a fruitless endeavor.
February 23, 2026
M&A Nuggets
M&A Nuggets: How to Avoid Hairline Fractures in M&A Deals
In medical parlance, a hairline fracture of the bone is caused by stress that can result from trauma, is painful, and curtails activity. Hairline fractures can also arise during an M&A transaction and are important to avoid. Hairline fractures can be caused by 1) lack of communication between the purchaser and the seller, 2) a delay in contacting third parties whose consent is required, and 3) professional advisors who put their desire to win at any cost above their client’s interests. How can hairline fractures be avoided? First, it is crucial for the purchaser and seller to fully understand each other’s objectives and to then memorialize all major business terms in a letter of intent. Too often, letters of intent are devoid of key business terms on the theory of “let’s just get the letter of intent signed and move on.” This often results in surprises, misunderstandings, and disappointment, all of which delay or doom a deal. Second, third parties whose consent is required, such as landlords and lenders, must be contacted well before the planned closing date. These third parties, who have their own processes and procedures when faced with a client sale, often take an extended time to react. Last, a seller should clearly explain its objectives, time frame, and expectations to its counsel and other advisors. A seller must work with advisors who will prioritize making the deal happen over winning every point in the negotiation. The lesson here is that, with proper communication and planning, hairline fractures in an M&A transaction can be avoided.
February 4, 2026
M&A Nuggets
M&A Nugget: Qualified Small Business Stock Update
In 1993, Congress passed a tax law intended to incentivize entrepreneurs to invest in early-stage companies. This tax law, often referred to as QSBS (Qualified Small Business Stock) allows stockholders to exclude from tax a substantial portion of the gain on certain business sales structured as stock sales. Last year, the law was amended to expand tax savings. Here is how the QSBS tax exemption works: If a stockholder holds shares of stock issued initially and currently held in a C corporation, and The shares of stock have been owned for at least three years, and The corporation has assets of less than $50M or $75M (depending on the year the stock was acquired), and At least 80% in value of the corporation’s assets are used in the active conduct of a “qualified trade or business”, then When stock is sold in a business sale, between 50% and 100% of the gain can be excluded from tax. A “qualified trade or business” means any trade or business, except certain service businesses (usually involving the rendering of professional services), banking and insurance businesses, and certain real estate-related businesses. The most significant change in 2025’s QSBS amendment was to increase the amount of gain that can be excluded from tax. For stock issued before July 4, 2025, the maximum exclusion is $10M. For stock issued on or after July 4, 2025, the maximum exclusion increases to $15M. The tax savings can be substantial. For example, on the sale of a business in a stock transaction for $20M, if the original ownership was acquired before July 4, 2025, $10M can be excluded from federal tax (as long as the stock was held for at least five years), resulting in tax savings in excess of $2M. Planning Opportunity A stockholder that is not a corporation is eligible for the QSBS. This includes individuals and trusts and presents an extraordinary planning opportunity for an individual to create a trust to hold a portion of the company’s ownership. If the trust is structured as a separate taxpayer, the individual and the trust can each take advantage of the QSBS tax exemption. Many strict requirements must be satisfied to qualify for the QSBS, and anyone considering use of this tax law should engage a professional advisor who has experience with those requirements.
January 22, 2026
M&A Nuggets
M&A Nugget: A Failed Transaction is Not the End — It is the Beginning of M&A Success
Many business owners have experienced a failed transaction. After devoting months, if not years, and extraordinary amounts of time, resources, and money to complete a business sale, the acquirer backs out. The reasons vary from external forces (general market or industry conditions) to seller’s internal issues (usually operational or financial challenges) to substantial due diligence items that raise the risk level for the acquirer (such as a large unanticipated liability, tax debt, or technology debt) to a change in the acquirer’s business direction. Although a termination of a transaction by an acquirer is disappointing, it can also present an opportunity to the business owner. The failure of a transaction should lead the business owner to examine the reasons for the acquirer backout and address them diligently and continuously. For example, one common internal factor leading to a buyer backout is an inadequate sales team, resulting in lower than expected revenues, or an insufficient EBITDA. Like a major league baseball team that makes a sizeable investment by signing a free agent, investing in an upgrade in the sales team can provide an ultimate payoff multiple times the investment. If an acquirer backout is a result of risky due diligence items that arose, steps should be taken to address them, for instance, by implementing more robust risk management policies and procedures. The fact is that many sellers left standing at the altar by their purchaser ultimately engage in a very successful transaction. Two specific experiences I have had in this regard are (1) a seller whose purchaser backed out in early 2020 because of lower than hoped for EBITDA projections, the seller then doubling down its efforts to increase sales and EBITDA with a resulting transaction three years later with the same purchaser for a purchase price 40% higher than the proposed 2020 purchase price; and (2) a seller’s potential acquirer backed out of a $100,000,000 purchase in 2022, leading to the seller redoubling its efforts to increase sales and EBITDA, with an ultimate sale only one year later for an enterprise value of $160,000,000. The lesson here is that in the M&A world, as in life, a failure can lead to great success.
January 6, 2026
M&A Nuggets
M&A Nugget: Smart Moves During an M&A Slowdown - Strategic Preparation for Business Owners
Although there are always segments of the M&A market that are busy, most advisors will tell you that there is a current slowdown in overall M&A activity. This gives sellers an opportune time to conduct “spring cleaning.” Just like the stock market, the M&A market ebbs and flows, and it is important that owners be prepared for the next M&A market flow. Here are a few steps you can take to be ready: Update Corporate Records – Make sure that ownership certificates reflect the current ownership of your business and that all required corporate documents exist. Consider implementing incentive plans to retain your key employees, which will help to drive the growth, value, and ultimate purchase price for your business. Review the classification of your business’s personnel between W-2 employees and independent contractors - always a hot-button issue with acquirers. Conduct an audit to ensure that your immigration documentation for employees is current and in compliance with the law. Review or have your CPA review the company’s compliance with sales tax rules to make sure that the company is filing sales tax returns and paying sales tax, where and when required. All of the above items, and many more, will be thoroughly investigated by any acquirer. By conducting spring cleaning now and arranging your business house to be in order, you will be steps ahead when the tempo of the M&A market picks up.
June 30, 2025
M&A Nuggets
M&A Nugget: Letter of Intents should be neither a Gimme nor an Obstacle
The letter of intent is the first significant document signed by the target and potential acquiror in a merger transaction. Many times over the years, clients have first contacted me after signing a letter of intent to sell or purchase a business. That is usually a mistake. The letter of intent should set forth the parties’ expectations of the business deal and the most core legal issues. Accomplishing that, while not allowing the letter of intent to bog down the progress of the deal, is a fine balance and takes professionals who have been through the process many years. Some clients hurry through a letter of intent because they are under a misconception that the letter of intent is non-binding. However, the letter of intent is in fact a legally binding document in part. Although most letters of intent do not create a legal obligation to close the transaction, letters of intent do typically contain clauses that bind the seller and the purchaser, including, a) a no-shop clause prohibiting the seller from seeking or negotiating with other buyers; b) a confidentiality provision; c) a statement that from the signing of the letter of intent through the termination of the letter of intent, the seller will operate in the ordinary course of business; d) the date the letter of intent expires; and e) a statement of which State’s law governs the letter of intent. The primary purposes of these binding clauses are 1) to ensure the buyer who will be expending time, money and resources investigating the seller, that the seller will operate ordinarily and not seek to negotiate against the buyer, and 2) to give the seller with comfort that its willingness to sell its business will remain confidential and that there will be a date to move on if the parties agree on the terms of a definitive agreement. Since the letter of intent sets the parties’ expectation of the business terms, a rushed letter of intent can miss the boat on key business terms that, if thought of later, are difficult to incorporate into the deal. While the letter of intent must be dealt with expeditiously to move on to the next steps as quickly as possible, one side will be very unhappy later if a key business term is missed.
December 18, 2024
M&A Nuggets
M&A Nuggets: Working Capital Requirement: The Seller's Scourge?
One of the most befuddling concepts to a seller in a merger transaction is the working capital requirement. Buyers base their purchase price offers assuming that there will be a normal amount of working capital in the business at closing. To a seller, the concept of leaving any working capital in the business may seem illogical. As a result of these disparate views, an inordinate amount of time is devoted to negotiating the working capital requirement. However, the working capital process does not need to burden moving a deal forward, There are two key steps in the working capital process. The first step is to establish the target working capital that will be required at closing. The second step is to determine after closing whether the target amount of working capital was left. An important part of determining the target working capital is the definition of working capital itself. In its most basic form, working capital equals current assets less current liabilities. However, sellers are often surprised when buyers propose to include in working capital certain current assets and current liabilities that the sellers have not historically included. Here are two key takeaways to be mindful of when negotiating the definition of working capital: Purchasers prefer to base working capital on a strict GAAP (Generally Accepted Accounting Principles) standard. Sellers, however, often maintain books and records at least in part on a basis other than strict GAAP. Sellers should therefore negotiate for certain of their historical methods of accounting to be utilized to determine working capital, even if at variance from GAAP. Although certain historical accounting practices may not be in accordance with GAAP, it is unusual for a seller’s financial statements to be totally divergent from GAAP, that is, many accounting practices will be in accordance with GAAP. There are, however, different methods to account for certain items, all of which are consistent with GAAP. For example, GAAP recognizes several different methods to value inventory. For those items that it is agreed GAAP will apply to, sellers should insist that an agreement be made on which alternative allowed GAAP method is to be used. The purpose of negotiating the finer details of the working capital target is to have a meeting of the minds between the buyer and the seller, the result of which is no adjustment, or a small adjustment, to the purchase price when actual closing working capital is compared to the target.
November 4, 2024
M&A Nuggets
M&A Nugget: Shhhh…Keep It Secret
Sellers usually do not want the world to know the terms under which their business is sold, especially the purchase price. Purchase agreements therefore typically contain a confidentiality provision requiring both sides to keep the transaction and its terms confidential. There are, however, exceptions to this “keep it secret” obligation that should be included in every agreement. First, the parties should be able to relay the transaction and its terms to their accountants, attorneys and advisors. Second, either side should be able to disclose the transaction in any dispute between the parties. Last, buyers often want to publicize an acquisition through a public notice, commonly referred to as a Tombstone. In non-public transactions, the Tombstone usually contains the names of the purchaser and seller, but not the purchase price. So, keep the transaction secret for the most part, but allow for the above reasonable instances of disclosure.
September 28, 2023
M&A Nuggets
M&A Nugget: Representations And Warranties Insurance
If you read a business purchase agreement carefully, you cannot help but notice that more pages are devoted to the seller’s representations and warranties than any other topic. A substantial amount of time and costs are spent negotiating the representations and warranties. Sellers are left at risk for an indemnity claim, especially in deals in which part of the purchase price is held back, which is common. Buyers are somewhat at risk, as the ability to collect an indemnity claim against a seller is not guaranteed. To address all of this, a unique kind of insurance was developed several years ago and is in use with increased frequency. The insurance is known simply as Representations and Warranties Insurance (R & W Insurance), and protects the buyer or the seller from inaccuracies in or breaches of the seller’s representations and warranties. The use of this insurance can allow the seller to avoid a purchase price holdback and the buyer to avoid having to collect an indemnity claim from the seller. There are many details that must be addressed with R & W Insurance, including the coverage limit, the deductible amount, the premium and the fact that certain representations and warranties will not be covered. R & W Insurance is typically used in transactions in the high-mid market to large market range. So, if your transaction falls within that range, consider exploring R & W Insurance.
September 25, 2023
M&A Nuggets
M&A Nugget: Health Care, Beware
The acquisition of a health care entity implicates two major federal statutes aimed at the health care industry. The Anti-Kickback Statute prohibits offering, paying or soliciting anything of value in return for referrals of heath care business covered by federal programs. A second law, known as Stark, prohibits physicians from referring Medicare patients for designated health services to an entity in which the physician has a financial relationship. Violations of these laws can result in severe and substantial penalties, including suspension from participation in federal health care programs and fines. Although these laws are usually discussed in the context of a health care provider’s ongoing operations, the laws can also apply to health care consulting and service firms and can be implicated in the acquisition of health care related entities. A purchaser must conduct appropriate due diligence to ascertain whether the seller has any exposure under these laws. The business terms of an acquisition can actually bring these laws into play. These health care laws are unique and a violation of them can have serious consequences. A purchaser of a health care entity should, therefore, secure advice from an advisor well-heeled in the health care law environment.
September 22, 2023
M&A Nuggets
M&A Nugget: Non-Competes- “The Reverse”
Buyers of businesses typically require the target and its owners to sign non-compete agreements which restrict the seller and its owners from competing after the closing. Those agreements obviously benefit the buyer. Non-compete provisions must, however, also be examined from a different perspective. As part of due diligence, the buyer examines the seller’s contracts to determine what contracts the buyer will assume, or take over. The contracts usually include leases, supply agreements and distribution agreements. Those contracts may contain non-compete restrictions or exclusivity provisions which bind the seller and benefit the other party to the contract. If the buyer assumes the contracts, the buyer takes on and is also bound by the non-compete and exclusivity provisions. It is therefore important for the buyer to carefully review contracts for the “non-compete reverse”.
September 20, 2023
Business
M&A Nugget: Dissenters’ Rights
In Maryland, and other states, a stockholder who does not believe that the purchase price to be paid by an acquirer is fair value has the right to object to the sale and receive payment for the fair value of the stock. The basic procedure for a stockholder to invoke that right is to object to the proposed transaction in writing, not vote in favor of the transaction and make a demand for payment of the stock. The target may then notify the stockholder of the price the target is willing to pay for the stock. If that price is not satisfactory to the owner, or the target does not notify the owner, then the owner may ask a court to obtain an appraisal to determine the fair value of the stock. If the court accepts the appraisal or, not accepting the appraisal, determines the fair value of the stock itself, the amount determined shall be entered as a judgment against the target. Although the use of these dissent and appraisal rights is rare, both parties to a sale transaction need to be aware of them, especially if the acquirer intends to purchase 100% of the target’s stock.
September 11, 2023
M&A Nuggets
M&A Nugget: Every Word Matters
This Nugget is for those English majors out there. In a purchase agreement, every word matters. The omission of a keyword or the incorrect use of a word can have an adverse impact on the purchaser’s or seller’s rights under the agreement. For example, in describing a list of assets to be acquired, using the word “including” after a delineated list, rather than “including, but not limited to” might have the effect of limiting the assets being acquired. Although logic tells us that “including” has the same meaning as “including, but not limited to,” some courts have held that “including” actually acts to limit the list of items to those listed after the word “including”. Therefore, the additional words “but not limited to” should always be used. As an example of keywords being omitted, consider the indemnification clause in a purchase agreement, by which the seller agrees to indemnify the purchaser for pre-closing operations and breaches of representations and warranties. An indemnification clause may state that the seller indemnifies the purchaser for any loss, damage and “cost and expenses” incurred. Can the purchaser recover its attorneys’ fees under such a clause? The answer is no. The indemnification clause must specifically include “attorneys’ fees and costs of the legal proceeding” as a recoverable item. Last, suppose a seller is asked to subordinate its right to receive payment to the purchaser’s lender. There are different kinds of subordination. Some lenders require “deep” subordination. The addition of the word deep drastically changes the extent to which a seller subordinates its right to payment. So, although the wordsmithing in the purchase agreement is the attorneys’ responsibility, it is important to keep in mind that every word matters.
September 8, 2023
Business
M & A Nuggets: The “KEIP”
The Key Employee Incentive Plan (“KEIP”), has become common as a way to incentivize key employees. The KEIP usually allows key employees to participate in an exit transaction through the grant of a percentage of the net proceeds from the sale of the business. Many transactions are structured with potential post-closing payments through earnouts or other mechanisms. Acquirers do not want or accept responsibility for KEIPs and, therefore, require that the seller maintain responsibility for the KEIP post-closing. During the negotiation process, a significant amount of time is devoted to the KEIP. Instead of leaving it to the acquirer to react to and dictate how the KEIP will be handled, owners of target companies should have a plan developed. The plan will have as its objective achieving the same end result that the acquirer will eventually insist on. Here are the two most common ways KEIPs are dealt with: Termination of the KEIP, with the only surviving provision being the payment of amounts that may be owed to the key employees in the future reducing the seller’s share of net proceeds, and The transfer of any future responsibility under the KEIP to the selling owners. When first developing a KEIP, it is important that the agreements that will memorialize the KEIP allow flexibility to achieve one of the results described above. By proactively dealing with the KEIP and having a plan in place, a target can lessen an acquirer’s concern about the KEIP and save both sides time and resources.
September 7, 2023
M&A Nuggets
M&A Nugget: To Split or Not to Split (The Tax Years)
The sale of the stock of an S Corporation raises a tax issue. The S Corporation is a pass through entity, that is, its net income or loss is passed through to its owners and included on their individual tax returns. When the sale of an S Corporation occurs effective the last day of the tax year, there is no tax issue – the seller owned the business for the entire year prior to the sale and therefore reports all income from that year. A sale in the middle of a year, however, raises an issue. Absent an agreement, the income of the company is reported using the “per share per day” method. Under that method, a pro rata portion of the income for the entire year is allocated to the seller. The pro rata portion is the number of days the seller owned the company during the year divided by 365. However, the purchaser and seller can agree to use what is known as the “cutoff” or “specific accounting” method. Under this method, the tax year is split into two years, the first year starting on the first day of the year and ending on the day before the closing date and the second year beginning on the closing date and ending on the last day of the year. Under this method, the seller is allocated one hundred percent of the income attributable to the first tax year. These two methods of allocating income (or loss) can result in substantially different tax impacts on the seller and the purchaser. When an S Corporation is sold in the middle of the year, the decision of whether or not to split the tax years must be carefully considered.
September 4, 2023
M&A Nuggets
M&A Nugget: A Purchaser’s Representation and Warranties
The seller’s representations and warranties in the agreement for the purchase and sale of a business usually comprise many pages. For a seller, however, it is important to include several representations and warranties by the purchaser, including that: 1) the transaction has been properly authorized by the purchaser’s governing body; 2) the purchaser is not party to any litigation that could adversely impact the transaction; 3) the purchaser is in good standing under the laws of the State in which it is organized; and 4) the purchaser is not insolvent, or a party to a bankruptcy proceeding. So, even though the seller’s representations and warranties in an agreement far outnumber the purchaser’s, it is important to the seller that the warranties listed above be included. The failure of any one of those warranties could prevent the transaction from going forward or from being successful
September 1, 2023
Business
M&A Nugget: Licenses – Odds and Ends
When acquiring a business, it is important to understand the licenses needed to operate that business. Some licenses, such as professional and contractor’s licenses, are obvious. There are many business activities that do not shout out as requiring a license, but for which the license is integral to operate the business. Here are a few examples: Locksmithing License Well Drillers License Salvage Yard Permit Bottled Water License Fire Sprinkler Contractors License Taxidermy License Licenses are either required to be held in the company’s name, a designated individual’s name, or both. There may be different levels for a particular license, such as master, associate or apprentice. Usually, even with a license in the company’s name, an individual who has gone through training and licensing, must be listed. For the purchaser entering into a new business, it can take weeks or even months to obtain the necessary licenses. It is therefore often crucial that the licensed individual agrees to allow the purchaser to continue to use the license and to provide services to the purchaser post-closing. The bottom line is that the purchaser and seller must plan for the purchaser to be able to operate with the requisite licenses on the closing date.
August 30, 2023
Business
M&A Nugget: Related Party Transactions
It is important that the purchaser investigate related party transactions when conducting due diligence. A related party transaction is a transaction or a contract between the target and another company controlled by, or related to, the owners of the target. An example of a related party transaction that is often encountered is a real estate lease between the owner of the target and the target. Another example is a key supplier agreement between the target and a relative of the target’s owner. Related party transactions must be examined to determine whether they are priced at fair market value. Often these arrangements are priced at higher than fair market value to benefit the related party. Another factor to consider is whether the related party will continue doing business with the purchaser post-closing, especially if the related party is a key supplier of goods or even a sole source provider. I have encountered situations where the key supplier was the target owner’s relative, and while more than happy to do business with the target on generous terms, would not commit to continuing those terms with the purchaser. So, as part of the purchaser’s due diligence, related party arrangements must be asked about and investigated.
August 28, 2023
Business
M&A Nugget: Cyber Insurance – The Tail
As data breaches have become larger (think Equifax, Target, and Yahoo) and more frequent, buyers and sellers should pay more attention to cyber insurance. Cyber insurance provides coverage for risks that arise out of the use of devices that maintain data, including computers and mobile phones. The insurance has existed for years, and generally covers losses incurred by the insured and claims of third parties seeking to be compensated for a data breach. One issue that arises with cyber insurance is that it is usually issued on a “claims-made” basis, which means that, for a loss to be covered, the claim must occur while the insurance policy was in place or within a specified period after the policy lapses. The problem with this is that cyber incidents may not be uncovered until well after the coverage period lapses. This is where tail insurance comes in. The inclusion of a tail provision extends the time during which a claim can be reported and therefore covered. Another way for a buyer to close the gap in coverage that exists with claims-made policies is to purchase cyber insurance with a retroactive coverage date, that will cover cyber incidents that occur before closing. The bottom line here is that with the increase in cyber security breaches, the buyer and seller need to ensure seamless coverage for incidents that occur before closing.
August 24, 2023
M&A Nuggets
M&A Nugget: The CPA – An Integral Advisor on the Deal
In a merger transaction, sellers should enlist the aid of their CPA throughout the sale process, from beginning to end. Here are but a few of the many reasons: First, near the inception of the deal, the CPA, who knows the seller’s books and records and finances well, can act as an advisor to the seller on the financial merits of the deal. Indeed, many CPA firms have specialists in business valuations, who can suggest a range of values the seller should be looking for. Second, an important financial decision in an asset sale is how the purchase price is to be allocated among the assets sold. Depending upon the allocation, there can be significant out of pocket tax consequences to the seller. Again, the seller’s CPA should be consulted to determine the purchase price allocation. Last, purchase agreements contain many representations and warranties by the seller regarding the target’s financial statements, tax returns and books and records. The seller’s CPA should always be consulted to review these specific representations and warranties for accuracy. The sale of your business is one of the most important events in your life, so make sure to include one of your most important advisors: your CPA.
August 21, 2023
M&A Nuggets
M&A Nugget: Stockholder Disclosure
In a merger transaction, sellers should enlist the aid of their CPA throughout the sale process, from beginning to end. Here are but a few of the many reasons: First, near the inception of the deal, the CPA, who knows the seller’s books and records and finances well, can act as an advisor to the seller on the financial merits of the deal. Indeed, many CPA firms have specialists in business valuations, who can suggest a range of values the seller should be looking for. Second, an important financial decision in an asset sale is how the purchase price is to be allocated among the assets sold. Depending upon the allocation, there can be significant out-of-pocket tax consequences to the seller. Again, the seller’s CPA should be consulted to determine the purchase price allocation. Lastly, purchase agreements contain many representations and warranties by the seller regarding the target’s financial statements, tax returns, books and records. The seller’s CPA should always be consulted to review these specific representations and warranties for accuracy. The sale of your business is one of the most important events in your life, so make sure to include one of your most important advisors: your CPA.
August 18, 2023
M&A Nuggets
M&A Nugget: Acquihire
One of the busiest areas of merger activity is in the government contracting sector. A major subsector of merger activity within that sector is acquihires. An acquihire is the purchase of a company, often a technology company, for the skills and expertise of its people. Acquihires have their own challenges for sellers and buyers. Since the main asset being acquired is the skill and knowledge of the seller’s employees, retention of the employees is crucial. That is why buyers often insist on a substantial portion of the purchase price being earned over time, and why sellers often request that buyers include stay bonuses as a deal component. Creative compensation models for the acquired employees must be considered. Since the main asset being acquired is basically people, the role of non-competition agreements is even more important. The golden point here is that a team of employees with unique technology skills and knowledge is valuable and both seller and buyer must consider the best ways to motivate the employees in the overall structure of the transaction.
August 16, 2023
M&A Nuggets
M&A Nuggets: The Drag-Along
In a sale structured as a stock purchase, most acquirors want to purchase one hundred percent of the ownership interests in the seller. That is why, if a seller has any minority owners, it is important to include a drag-along clause in the agreement among the owners of the seller. A drag-along clause basically states that if owners holding a certain percentage of the ownership agree to a sale, the owners can require the remaining owners to participate in the sale. The use of the drag-along clause prevents a minority owner from in effect vetoing a sale by not agreeing to sell. Several details need to be included in the drag-along clause, including the percentage needed to approve the sale and to drag-along the non-approving owners, whether the non-approving owners have the right of first refusal to purchase the company on the same terms offered by the third party and whether the drag-along right applies initially or at some future date. The big picture here is that the simple step of including drag-along rights in the ownership agreement helps to ensure the sale of one hundred percent of a company.
August 10, 2023
M&A Nuggets
M&A Nugget: The Best Fit
Most business transitions are accomplished by a sale to a third party. The merger and acquisition is, however, one of several ways that an owner can transition a business. The question is – what is the best fit for the owner? There are other alternatives that should be considered, if applicable. Does the owner have family who has worked in the business? If so, the owner could accomplish both business planning and estate planning objectives by transferring ownership to the family member. Are there key management personnel who are ready now or will be ready in the near future to take the helm of the business? If so, an exit plan can be implemented by which the ownership is transitioned to management over time. A sale to a third party might mean a greater purchase price and/or more secure source of funding for a purchase price to be paid over time. On the other hand, a sale to a third party might also result in a shorter term of continuing employment and therefore a stream of income over a shorter period of time than one of the other alternatives discussed above. There are many other factors to consider. In any event, when deciding how to exit your business, just as with a work suit, the question is which alternative is the best fit.
August 7, 2023
M&A Nuggets
M&A Nugget: Licenses – A Potential Holdup
Many target companies own a license that is required to engage in business. To the buyer, the ability to use the license is therefore crucial. Some licenses can be transferred, but most licenses cannot, in which case the buyer is required to apply for a new license. This important part of getting a deal done is often mismanaged. The keys to assure that the license process does not unduly delay closing are preparation, timing, and smart use of resources. On the preparation end, a buyer needs to do its homework to review the applicable rules and regulations governing the license. These rules often change, and it therefore is important to make sure that the most recent rules are reviewed. As for timing, applications to transfer a license or obtain a new license must be reviewed by the applicable government agency, which is often understaffed and underfunded. The license application should be made early enough to allow the government agency more than enough time to review and approve the license. Last, in terms of smart use of resources, it is often wise to engage a local expert who deals with the particular kind of license on a regular basis. By taking the above steps, the buyer and seller can make sure that the required license is not the holdup to closing.
August 2, 2023
M&A Nuggets
M&A Nuggets: Fair Notice
This nugget covers one of the mundane but important procedural aspects of a purchase agreement, called “Notice”. Every purchase agreement should contain a paragraph describing the methods by which written notice of a matter must be given. There may be important matters that the buyer/seller needs to notify the other about. For example, notification of the buyer’s decision to extend the closing date or the buyer’s claim for indemnification after the closing. It is therefore important that the method for providing notice be reliable enough to assure that the notice will be received and that the receiver of the notice will have enough time to respond. Boilerplate notice paragraphs often allow notice to be given by several methods, including hand-delivery, overnight mail, certified mail, fax transmission and e-mail transmission. In my opinion, neither certified mail nor fax transmission should be used as a delivery method. Certified mail, even if restricted to delivery of a specified person, is often either not retrieved or signed for by someone other than the designated person. Fax communications are used much less often than before e-mail existed and are often directed to a general fax line that may not make its way to the intended recipient. My preference is to limit the modes of delivery of the written notice to hand-delivery or overnight mail sent by a national recognized courier, along with, and not in lieu of, e-mail transmission. By being particular in drafting the notice paragraph, neither the purchaser nor the seller will risk missing an important notification from the other.
July 31, 2023
Business
Paycheck Protection Program (PPP) Loan Forgiveness Primer
This blog post may contain information that was accurate at the time of publication but could become outdated over time. We strive to provide relevant and timely content, but circumstances, facts, and data can change. Users are encouraged to verify the current status of any information presented and seek updated guidance where necessary. Originally posted on 6/9/2020, no content changes. You applied for and obtained a Paycheck Protection Program loan. Now it is time to ask for the loan to be forgiven. Listen and watch here for a 30 minute presentation from the Offit Kurman CV-19 Business Response Team on the what, when and how to that apply to the loan forgiveness process, along with keen insights into that process. This presentation was recorded on June 5, 2020. For any updates to the loan forgiveness rules since then, please contact us.
June 9, 2023
M&A Nuggets
M & A Nuggets: Beware the Four Corners Offense
As the NCAA Basketball Tournament begins this week, it is appropriate to remember the “Four Corners Offense” and tie it to the merger process. The “Four Corners Offense” was popularized by the University of North Carolina in the 1960s and 1970s. The offense involved four of five players standing in the corners of the offensive half court with the fifth player dribbling in the middle, often for several minutes at a time. The result was a big slowdown of the game with no progress. Sellers of businesses devote substantial time, energy and resources to move a sale transaction to closing, but ultimately, are at the mercy of the purchaser. At the inception of the relationship between the potential seller and purchaser, all things are rosy. The purchaser lets the seller know how impressive the seller’s business is and how terrific of a fit the seller will be with the purchaser. As time unfolds during the merger process, sellers need to have an eagle eye for action or inaction by the purchaser that is not so obvious, but that indicates the purchaser intends to slow down the process, and which often results in the purchaser retreating from the transaction. Here are a few actions or inactions that should trigger concern: Comment from Purchaser: “One or two of our board (or investment committee) members are thinking about the pricing of the transaction or the current economic headwinds.” Real Meaning: The purchaser’s decision making body is rethinking the transaction. Inaction from Purchaser: Purchaser’s counsel is silent on when the purchase agreement will be forthcoming.Real Meaning: Purchaser has told its counsel not to prepare the purchase agreement because the purchaser is rethinking the transaction. Comment from Purchaser: “We are re-examining the valuation based upon current numbers.”Real Meaning: The purchaser intends to lower the purchase price or not proceed. The objective of seller and its counsel is to move the transaction along as fast as possible towards closing, but the above warning signs may indicate that the purchaser is deploying the “Four Corners Offense” and that the purchaser will withdraw. Being able to recognize this sooner rather than later will allow the seller to save a tremendous amount of time, energy and money and refocus on growing its business until such time as a purchaser with intent to complete a transaction arrives on the court ready to play and finish.
March 16, 2023
M&A Nuggets
M&A Nuggets: Be Prepared for Due Diligence, Before You Go to Market Part 4 – Employee vs. Contractor Classification
This is Part 4 of a series on steps business sellers should take to make sure their house is in order before going to market. One of the hot button issues that buyers examine when conducting due diligence is whether the seller has properly classified a worker as an independent contractor versus an employee. The contractor versus employee issue has always been a target of the Internal Revenue Service and United States Department of Labor. If a worker improperly classified as a contractor is in fact an employee, the consequence can be a finding that the employer owes back payroll taxes, interest and penalties. Some employers stretch their classifications of workers as independent contractors to avoid having to pay payroll tax and provide coverage under the employer’s employee benefit plans, thereby saving costs that would be incurred if the person was classified as an employee. Regardless of an employer’s past practice, potential buyers are certain to examine the issue and, if a buyer believes that there is the potential for misclassification, a specific indemnification by the seller of the buyer will be required. Prior to going to market, sellers should review any classification of workers as independent contractors. The factors looked at to determine whether a worker is an independent contractor or an employee, although not crystal clear, depend in large part on whether the employer controls the worker’s schedule, provides all of the resources the worker needs to work and restricts the worker from engaging in competition. Independent contractor relationships should be properly documented with contractor agreements. The factors that determine worker status should be reviewed as they apply to each contractor and, if necessary, the relationship between the worker and the company should be adjusted to either make clear that the factors weighing in favor of a contractor determination will be satisfied, or to shift the worker to an employee. By examining the contractor versus employee issue proactively, a seller can not only provide comfort to interested buyers that this issue has been dealt with, but also avoid potential payroll tax and other regulatory issues later.
September 28, 2022
