When navigating an M&A transaction, there are many matters that should be addressed at the beginning of the process. According to the best escrow company in AZ, the target company and the acquiring company should consider the following issues when contemplating a transaction.
1. Deal Structure: Three alternatives exist for structuring a transaction – stock purchase, asset sale and merger. The acquirer and target have opposing legal interests and considerations within each option. Agents at the best escrow company in AZ stress that it is important to recognize and address material issues when negotiating a specific deal structure.
2. Cash Versus Equity: The method of payment for a transaction may be a key factor for both parties. Cash is the most fluid and least risky method from the target’s standpoint as there is no doubt regarding the true market value of the transaction and it removes contingency payments. Equity involves the payment of the acquiring company’s equity, issued to the stockholders of the target, at a determined share proportional to the target’s value.
3. Working Capital Adjustments: M&A transactions typically include a working capital (W/C) adjustment as an element of the purchase price. The acquirer wants to ensure that it obtains a target with adequate W/C to meet the requirements of the business post-closing, including obligations to customers and trade creditors. The target wants to receive consideration for the assets that allowed the business to operate and produce the profits that sparked the acquirer’s desire to buy the business in the first place.
4. Escrows and Earn-Outs: The letter of intent should clearly indicate any contingency to the payment of the purchase price in a transaction, including any escrow and earn-out. The purpose of an escrow is to provide options for an acquirer in the event there are violations of the representations and warranties made by the target or upon the occurrence of certain other events. Although escrows are normal in M&A transactions, the terms of an escrow can differ significantly.
5. Representations and Warranties: The definitive agreement should include detailed representations and warranties by the target with respect to such matters as authority, capitalization, intellectual property, tax, financial statements, compliance with law, employment, ERISA and material contracts.
6. Target Indemnification: Target indemnification provisions are always negotiated in any M&A transaction. One of the initial issues to be determined is what types of indemnification claims will be capped at the escrow amount. In some cases, claims may be capped at the escrow.
7. Joint and Several Liability: According to the best escrow company in AZ, one of the primary issues to consider regarding indemnification, from the acquirer’s perspective, is to what extent each of the target’s stockholders will participate in any indemnification obligations post-closing.
8. Closing Conditions: A section of the definitive agreement will include a list of closing conditions which must be met in order for the parties to close the transaction. These are often negotiated at the time of the definitive agreement, although sometimes a detailed list will be included in the letter of intent.
9. Non-Competes and Non-Solicits: A covenant not to compete or solicit is a promise by the selling shareholder(s) of the target to not, for a certain timeframe or after termination of employment with the target/acquirer, engage in a defined business activity that is competitive with the target’s/acquirer’s, or attempt to entice customers or employees of the target/acquirer.
If you need help with any issues pertaining to your corporate escrow arrangements, trust the experts at the best escrow company in AZ. Call our office today to schedule a consultation so we can discuss your goals and options.