Category: M&A Nuggets
Clear ResultsMergers 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
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
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
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
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
M&A Nuggets
M&A Nuggets: Be Prepared for Due Diligence, Before You Go to Market Part 3 – Privacy Policies
This is Part 3 of a series on steps business sellers should take to make sure their house is in order before going to market. The Health Insurance Portability and Accountability Act, better known as HIPAA, was enacted in 1996 as one of the first laws to protect the privacy of personal identifiable information. The increase in attempts by cybercriminals to obtain or hold hostage private information, whether through ransomware, phishing attacks or other efforts, has been in part the reason for spurts in the enactment of additional privacy laws to protect personal information. As a result of the greater susceptibility of personal information to attack and the increase in the number of laws designed to protect the information, privacy laws and policies have become one of the due diligence areas most focused on by buyers. To be prepared, sellers must first understand which privacy laws apply to them. In the United States, HIPAA, which is designed to protect healthcare information, is the most significant federal law. At present, there is no overall federal law protecting privacy information in general. However, several States have enacted their own privacy laws, including California, Virginia, Utah, Colorado and Connecticut, and more are on the way. It is important to determine whether these laws apply to your business. A State’s law may apply to your business even though you do not do business in that State. Among the most important overseas laws is the General Data Protection Regulation, known as GDPR, which regulates the information of residents of the European Union. Again, just because your business does not operate in the European Union does not mean that your business is not subject to the GDPR, as that law applies to businesses that collect and process information of European residents. The privacy laws establish policies and standards that must be followed to protect personal information. Once it is understood what laws are applicable to your business, the next step is to determine whether your business has in place the policies and standards that are required, including whether its online privacy policies and terms of use are sufficient. Making sure that your business is in compliance with privacy laws will not only go a long way to protect the personal information of persons who do business with you (your employees, customers and members of the public who visits your website or app), but will provide comfort to potential buyers that you have adequately dealt with this area of high risk. If you have any questions about this or any other M&A issue, please contact Glenn Solomon at gsolomon@offitkurman.com or 443-738-1522.
September 22, 2022
M&A Nuggets
M&A Nuggets: Be Prepared … for Due Diligence, Before You Seek to Sell Part 1 – Sales Tax
The due diligence process, during which the purchaser requests and analyzes large volumes of information, requires a huge time commitment from the sellers’ personnel. Unknown issues and issues which are known but have not been dealt with in the past, can rear their head during the due diligence process, interrupt the otherwise smooth flow of information exchange and, in turn, cause unnecessary pauses and extensions of the deal. To avoid this, it is wise to address these issues prior to seeking to sell the business. Routine items that are easily buttoned down before negotiations begin include making sure corporate documents are in place, that employment policies are up to date and that intellectual property, such as trademarks, have been properly protected. Other issues are not so routine. This article will focus one of those more unusual, or less thought of, issues – sales tax. The issue is – has the business properly collected, paid and reported all required sales tax. Unfortunately, this issue often arises for the first time during the due diligence process, when the purchaser asks about it. Many states have expanded the application of their sales tax statutes to more and more activities, particularly services, and to more ways that products or services are delivered, particularly on-line and out-of-state sales. Many sellers are surprised to learn during the due diligence process that sales tax had not been properly accounted for. The sales tax number not accounted for, when added to interest and potential penalties owed to state governments, can be a significant number and could result in part of the purchase price being held back at closing. This all can be avoided by conducting a sales tax analysis prior to entering into negotiations. The following questions should be answered: 1) which services and products the company provides are subject to sales tax, 2) are the means by which the company provides the services and products (on-line sales, shipments out-of-state) taxable, and 3) are any of the company’s customers (nonprofits, for example) are exempt from the payment of sales tax. The sales tax analysis can be laborious, given that the laws vary state by state. However, being up to speed on the issue and ensuring that the company is in compliance beforehand can save a lot of time, money and worry during the negotiation process. Look for the next issue – change of control provisions.
July 7, 2022
M&A Nuggets
M&A Nuggets: Transparency
Suppose you are in the process of selling your business, and you are aware of an existing issue or a new issue arises that you believe could have an impact on a purchaser’s view of your company. Should you disclose the matter to the potential purchaser? The answer depends on where you are in the process of the sale. If you are at the preliminary discussion stage with potential purchasers, none of whom have committed to move forward, then disclosure is probably not called for. Prior to having a committed potential purchaser ready to move forward, many of these issues can be dealt with and disposed of. If, however, you are at the stage at which a potential purchaser is fully committed to move forward to acquire your business, then the answer is yes. You should disclose. The kinds of issues to be disclosed include an existing or new lawsuit, a difficult co-owner or key employee, or a provision in a key third party agreement, such as a right of first refusal, that has to be dealt with. Often, the perception of the severity of an issue is greater than reality. Further, purchasers of businesses are accustomed to hiccups along the way. Some of these kinds of matters may not be able to be resolved before closing and therefore a purchaser will have to deal with them after closing. Being transparent and communicating potential major issues to the purchaser early on allows both sides to determine whether to move forward and, if so, how to address the issue. Waiting to disclose a major issue to a purchaser could cause delays, higher expenses to be incurred and possibly the loss of a deal. A benefit of being transparent is that it engenders in the purchaser a sense of goodwill and fair dealing on the part of the seller. Certainly, throughout negotiations in the sale of a business, there are times when it is best to maintain a poker face and not let the purchaser know your reaction to an issue. In the event of a potentially major issue that the purchaser is likely to be concerned about, however, the chips are off the table and transparency is the better practice. If you have any questions about this or any other M&A issue, please contact Glenn Solomon at gsolomon@offitkurman.com or 443-738-1522.
March 16, 2022
M&A Nuggets
M&A Nuggets: Listen, Listen, Listen
In the first M & A Nugget five years ago, I discussed the importance of “Think Win-Win”, which is Habit 4 in Stephen Covey’s book “The 7 Habits of Highly Effective People”. Habit 5 from that book is “Seek First to Understand, Then to be Understood”. This Habit is equally important in an M & A transaction. While both sides in a transaction often communicate early on what each side wants to achieve, it is important for the buyer and seller to first understand what the objectives and motivations of the other side are. This is crucial at an early stage, to determine whether the merger has the chance to succeed. For example, from the seller’s standpoint, what are the buyer’s short and long term plans for the target company, what is the buyer’s intention with respect to the employees of the target company post-closing, and what does the buyer want out of the owner of the target company post-closing? From the buyer’s perspective, what involvement with the business does the seller’s owner want to have post-closing, is the seller at a stage of life in which the seller desires to participate in an equity rollover and have a second opportunity to share in a future sale of the business, and what are the plans post-closing of the seller’s key management team? Understanding the other side’s answers to these questions goes a long way to help the listener decide whether to proceed and whether it makes sense to make any adjustments in the listener’s thinking about how to proceed with the transaction before and after closing. If the parties decide that it is mutually beneficial to move forward after listening to each other, the detailed negotiations will follow. As the myriad of important legal, operational, financial and tax issues arise, understanding one side’s viewpoint and overall objectives in the transaction is extremely productive in resolving these issues in a way that satisfies both sides. So, remember to listen first, and to then think and respond. If you have any questions about this or any other M&A issue, please contact Glenn Solomon at gsolomon@offitkurman.com or 443-738-1522.
March 9, 2022
M&A Nuggets
M&A Nuggets: Exclusivity
One important component of the letter of intent for the sale and purchase of a business is the exclusivity paragraph. In that paragraph, the seller agrees to deal only with the interested purchaser for a specified period of time. This exclusivity is important to purchasers, because they will be devoting significant time, resources and money to investigate the seller, conduct due diligence and determine the final terms of the transaction to present to the seller. The exclusivity obligation is therefore almost always a requirement. However, sellers should be wary that the exclusivity paragraph is not too restrictive. The exclusivity language should always contain the period of time the seller agrees to negotiate only with the interested purchaser. That period of time needs to be thoughtfully considered. A seller’s business is not on the market during the exclusivity period. Too long of a period could result in missed opportunities if the deal contemplated by the letter of intent falls apart. Exclusivity periods of ninety days are common. The first drafts of exclusivity paragraphs presented by buyers usually contain a requirement that the seller notify the buyer of any other offers received, the names of the party submitting the offer and the terms of the offer. The problem with this language is that offers are often submitted on a confidential basis. So, while it is not problematic for a seller to notify the other party to the letter of intent that another offer has been received, the name and terms of the offer should be not be disclosed and the exclusivity paragraph should be modified accordingly. The bottom line here is that an exclusivity paragraph in a letter of intent is necessary, but it should be modified to accommodate the needs of the buyer while not unduly restricting the seller. If you have any questions about this or any other M&A issue, please contact Glenn Solomon at gsolomon@offitkurman.com or 443-738-1522.
February 22, 2022
M&A Nuggets
M&A Nuggets: How Will Your Company Be Valued
Up until the early 2000s, the valuation of a privately held company was determined largely by following the guidelines of a 1959 revenue ruling issued by the Internal Revenue Service, which focused on earnings. A lot has changed and a lot has remained the same since then. How will your company be valued in the market? Presently, the most common valuation methodologies are (1) a multiple of earnings before interest, taxes, depreciation and amortization (“EBITDA”), and (2) a multiple of gross revenues. The multiple of EBITDA method remains the most commonly used method of valuation. Earnings, or profits, before the deductions for depreciation, interest, taxes and amortization are determined for anywhere from the most recent one year to most recent three year period. The earnings are then adjusted, or smoothed out, to eliminate unusual variances that will not be recurring, such as one-time gains on sales of assets or one-time losses. The average adjusted earnings are then multiplied by a cap factor. The cap factor used ranges widely, depending on the industry. A more recent valuation phenomena, which is now commonly used, is the multiple of revenue method. By this method, gross revenues are simply multiplied by a number. As with the EBITDA method, the range of multiples can vary widely, again, depending on the industry. The revenue multiple method is not for every company. Younger companies with no profits or companies which have very fast growth prospects are often valued using the revenue multiplier method. Not surprisingly, that method is now common for technology companies. Under either the EBITDA or the revenue multiplier methods of valuation, a gem looked at and favored by buyers is recurring revenue, meaning revenue that is expected to continue in the future. Today, most companies that desire to increase value should focus on adding recurring revenue. Before looking for a purchaser for your company, it is important to understand how your company will be valued. The above nugget offers a brief explanation of that. If you have any questions about this or any other M&A issue, please contact Glenn Solomon at gsolomon@offitkurman.com or 443-738-1522.
February 15, 2022
M&A Nuggets
M&A Nuggets: Laws Triggered by a Merger
As part of due diligence, purchasers investigate whether selling targets are in compliance with the myriad of laws governing a target’s historical business operations. Separate and apart from those laws, are laws that are actually triggered by a merger, that is, that would not apply but for the planned merger. Sellers and purchasers must be aware of these laws to determine whether they apply, and if they do, take steps to comply so that the merger is not delayed or prohibited. Here are four examples of laws triggered by a merger: The WARN Act, which stands for Worker Adjustment and Retraining Notification Act. This law requires employers to provide the United States Department of Labor with at least 60 days’ prior notice of any plant closing or mass layoff. The rule generally applies to employers with at least 100 employees when an event occurs that results in a layoff of at least 50 employees. Some states have their own version of the WARN Act. Any merger transaction that involves a plant closing or a mass layoff needs to be vetted to determine whether the WARN Act applies; The Hart Scott Rodino Act. The purpose of this law is to allow the government a period of time to determine that a merger will not violate anti-trust laws. The Act requires notice to be given to the United States Department of Justice and imposes a 30-day waiting period before a merger of a certain size can occur. Generally, if the merger involves a target with a value greater than $92 million or the purchaser and seller have assets or sales of at least $184 million and $18.4 million, the Hart Scott Rodino rules apply; Bulk Transfer Laws. These are state laws that require a buyer of a business that sells inventory to notify creditors in advance of a business sale. Although the Bulk Transfer laws were uniform across all states, many states have eliminated their Bulk Transfer laws. In states with Bulk Transfer laws, it is common for the parties to a merger transaction to agree to waive compliance with the laws. Tax Elections. Many significant tax issues arise in merger transactions. Some of these tax issues require agreements between the seller and purchaser and timely elections of tax consequences to be filed with the Internal Revenue Service. For example, the manner in which the purchase price is allocated in an asset purchase is usually agreed to and requires a common filing with the Internal Revenue Service. In a stock purchase, there is often an agreement to split the tax year into two short tax years, one tax year beginning on the first day of the year of the sale and ending on the closing date and the second tax year beginning on the day after the closing date and ending on the last day of the year in which the sale occurs. This split tax year agreement also requires a filing with the Internal Revenue Service. It is crucial that the seller and purchaser understand which “triggering” laws apply to a merger, so that timely notice under the laws is given, and that closing will not be delayed because of non-compliance. If you have any questions about this or any other M&A issue, please contact Glenn Solomon at gsolomon@offitkurman.com or 443-738-1522.
July 28, 2021
M&A Nuggets
M&A Nuggets: The Due Diligence Barrage - How to React
After the letter of intent for the sale and purchase of a business is signed, the potential purchaser will then deliver its due diligence list to the target company. The due diligence list can be voluminous. It is not unusual for a list to contain twenty pages with more than 200 specific requests. The topics covered include many areas, from financial to tax to corporate and operations. The target’s owner may be inclined to attempt to handle the due diligence list on its own. It is crucial, however, that the target’s advisors be brought in upon receipt of the due diligence list. Here is why: Due diligence lists often are a purchaser’s attempt to “shoot for the moon”, requesting details that may not be needed for time periods that may not be needed. In fact, the due diligence list is negotiable. Your advisors can guide you on which items the potential purchaser should be asked to remove from the list; For the reasons discussed below, it is important that an organized system be created by which each request and answer to it is linked. Your advisors can assist you to set up that system; Documents provided in response to the due diligence requests usually contain information that must later be disclosed in the representations and warranties section of the purchase agreement. It is important for your advisors to be able to determine early on what disclosures in the purchase agreement will need to be made; and In that regard, documents to be provided in due diligence may contain a surprise or two, since many of the documents may be old and/or never have been reviewed. For example, in one transaction I handled in 2019, one of the target’s vendor contracts contained a right of first refusal in the vendor to purchase the target. These kinds of surprises need to be learned about and dealt with soon in the sale process. By asking for the assistance of your advisors early on, the due diligence process can be made much more manageable, resulting in a substantial savings of time and money. If you have any questions about this or any other M&A issue, please contact Glenn Solomon at gsolomon@offitkurman.com or 443-738-1522.
July 21, 2021
M&A Nuggets
M&A Nuggets: Know Your Buyer
Many times, a business seeking to sell is in discussions with the wrong buyer – a mismatch. Negotiating with a mismatched buyer can be a waste of time, money and resources and lead to either the demise of a potential transaction or a transaction taking longer with much greater effort, all of which could have been avoided. It is therefore very important that a seller conduct its own due diligence on potential purchasers. This due diligence should include the following: Checking the background of the owners of the potential purchaser – in conducting this check, treat the owners as you would a job applicant; The potential purchaser’s experience in the M & A arena – has the potential purchaser acquired any businesses? The potential purchaser’s finances – requests should be made for the potential purchaser’s financial statements and for evidence of the source of its purchase price funding; References – ask the potential purchaser for the names and contact information of the owners of other companies that have been acquired and contact those references; NDA – insist that any potential purchaser sign a non-disclosure agreement up front. Any reluctance to do so should be a warning sign; The potential purchaser’s objectives – obtain a clear understanding of the purchaser’s objectives, which can vary greatly depending upon whether the purchaser is strategic or financial; and Time Frame – ask the purchaser for a definite time frame in which it anticipates closing the transaction. A reluctance to state a time frame could indicate that you are dealing with a purchaser which is always exploring but never willing to commit. By following the above suggestions, a seller can go a long way to assure that its purchaser is a match. If you have any questions about this or any other M&A issue, please contact Glenn Solomon at gsolomon@offitkurman.com or 443-738-1522.
May 28, 2021
