The time may come when you’re interested in merging your business with another. Mergers are not uncommon in the business world; however, they are legally complicated and require quite a few steps to ensure that all parties are fairly compensated. Below is a step-by-step reference for how to perform a business merger.
Step #1: Identify Potential Businesses
Examine businesses and competitors that would complement yours, and draft a list of possible targets. It’s important to spend time up-front considering your options so that you have a clear understanding of what you’re looking for when merging a business. How would these businesses not only merge well with yours, but add to the value of your business? What do they have that your business lacks and that would be too difficult to build on your own?
Step #2: Retain a Merger and Acquisitions Specialist
It’s very important to have good legal help in the process of a merger. Ask for recommendations from trusted businesspeople in your community, your local Chamber of Commerce or your general counsel. Make sure to thoroughly vet your selected M&A specialist and give yourself peace of mind throughout the process that you’ve selected the right partner.
Step #3: Contact Identified Targets
This step is more of a fact-finding mission – a way to test the temperature of the market. You want to contact the businesses you’ve identified as potential targets and gauge their levels of interest. Typically, you’ll want to contact the business development manager or Chief Operating Officer (COO) of the business you’re interested in. They may route you to their attorney, so be prepared to answer many questions.
Step #4: Ask for an Executive Summary
The seller typically drafts an executive summary, sometimes called a teaser, which outlines just enough information to really pique the buyer’s curiosity. You may have already uncovered much of this information during your initial investigation, but it’s important to see what the seller deems as the business’ selling points. This will give you a snapshot of their strengths and weaknesses and may help you to focus your research moving forward.
Step #5: Sign a Confidentiality Agreement
If both sides agree to further explore the idea of a merger, make sure all parties sign a confidentiality agreement that is legally binding. This protects the buyer and the seller from possible repercussions.
Step #6: Receive the Confidential Information Memorandum (CIM)
This is the seller’s business bible, for lack of a better term. It contains all of the pertinent information related to the company, including history, customer information, product details, financials and more. A complete CIM should go a long way to helping the buyer decide whether to make an offer.
Step #7: Submit an Indication of Interest
If the buyer determines he or she is interested in moving forward, an Indication of Interest must be submitted to the seller. The IOI will include a ballpark valuation of the company’s worth, but does not include a set purchase price.
Step #8: Conduct Management Meetings
It’s finally time to meet face to face. Buyer and seller now have the opportunity to get to know each other, ask any questions or get clarification on any of the previously submitted information. The seller also has the opportunity to update the buyer on any new developments with the business, profits, personnel, etc. since the process began.
Step #9: Determine the Value of the Business
Now that you have collected all of the information and met with the seller, you and your retained counsel can make an accurate estimation of the business’ value. Here are a few of the more popular methods for determining a purchase price:
- Capitalized Earning Method: Price is based on the buyer’s expected return on investment.
- Excess Earning Method: Price is based on the buyer’s expected return on investment, but the costs of any assets are separated from the other anticipated earnings.
- Cash Flow Method: This method allows the buyer to determine how much of a loan the anticipated cash flow of the business can support. This loan amount is then used to measure the firm’s ability to service any incurred debt.
- Tangible Assets (Balance Sheet) Method: Price is determined by quite literally adding up the value of all of the business’ assets.
Step #10: Submit Letter of Intent
Once the buyer has determined the value of the business and a purchase a price, they must submit an offer, in writing, to the seller. This is called a Letter of Intent (LOI).
Step #11: Come to an Agreement
This step can go on for quite some time while both sides try to broker a deal that is mutually beneficial. Do not lose hope during the negotiation phase, as it is very common for sellers and buyers to adjust the terms in an effort for all parties to feel comfortable.
Step #12: Close the Deal
Translation: Sign a lot of paperwork. Both the buyer and seller’s lawyers should draft and review the paperwork, including a Merger Agreement, before any signatures are committed to paper. All of the terms described within the documents should have been clearly agreed upon during step eleven.
Here is a checklist of items to review when closing a business purchase
- Adjusted purchase price: Includes an up-to-date account of all of the businesses assets as well as any prorated costs for rent, utilities or inventory at the time of the close.
- Review Required Documents: These documents should include a corporate resolution approving the sale, the seller’s tax releases, etc. Your Secretary of State Office is a great resource for necessary documentation, especially as it pertains to your state.
- Security Agreements: Outlines what will be used as collateral to ensure payment of the loan.
- UCC Financing Statements: Uniform Commercial Code documents are necessary for business transactions that take place between different states. They can be found with the Secretary of State in the state where you’ll be purchasing the business.
- Lease: If you’re taking over the physical lease of the business, make sure you have met with the landlord and he or she has agreed to terms. You may also decide to negotiate a new lease with the landlord; just be sure that the former lease has been terminated.
- Vehicles: If vehicles are included in the sale, you will need to fill out transfer paperwork for the titles. Check with the Department of Motor Vehicles for the proper procedure.
- Bill of Sale: This proves the sale of the business. It also serves as a transfer of ownership rights for any tangible assets that are not otherwise transferred on their own.
- Closing or Settlement Sheet: This will list all financial aspects of the sale. Everything listed on the settlement sheet should have been previously discussed and agreed upon prior to closing. In other words, there shouldn’t be any surprises in this document.
A few other things to consider when buying a business
- Copyright, Trademarks or Patents: If any of these are included in the sale, you may need to fill out specific paperwork.
- Franchise: If the business is a franchise, there may be franchise-specific documents for you to complete.
- Non-Compete Agreement: It might be a good idea to have the seller sign a non-compete agreement. These are typically limited to a specific timeframe (i.e. one year) and prevent the seller from conducting business in the same field. This will allow you to take full advantage of the business’ assets, including existing customers, without the fear of competing with the previous owner.
Closing the deal will enable you to begin the real work of merging two businesses. By making sure that everything with the sale is complete and legally binding, you’ll be able to commit all your attention to the task of integrating both businesses.