How to Acquire a Company
Acquiring a company is a major decision and can be a market multiplier for expanding your business. Acquisitions can be a smart and fast way to build your business and expand into different products, services, or geographic areas. Businesses need to take caution when merging or acquiring another company. The key to a successful acquisition is due diligence. Every merger or acquisition is preceded by sometimes months of research and planning. The major aspects of due diligence for an acquisition or merger include cultural review, background/legal review, and financial review. Filing the appropriate state and corporate documentation follows the due diligence and acquisition. Each step is important and needs to be approached carefully.
A culture review of a company often happens before any negotiation of offer. When a company is targeted for an acquisition or merger through personal networks, there is a greater chance of the companies being able to match in regards to service and market positioning. Small business mergers and acquisitions are often developed through personal networks, which allows the companies to have a familiarity with each other and how each operates. Understanding the similarities and differences will reduce the risk and time involved in creating a plan to integrate both workforces and systems.
Establishing a good fit between the two companies is one of the most important aspects of a successful merger or acquisition. Being able to seamlessly integrate a companies workforce and system into your own can save months of human resource and logistics work. Letting your workforce know the reasons behind the acquisition, planning for key milestones, and encouraging feedback throughout the process will help ease the transition for your staff.
Background/legal review involves researching the history of the company, searching for legal issues or concerns, and other background information that will quickly exclude companies that would not be a good acquisition. The goal is to identify deal-breaking issues before too much of your time and resources are committed. A great place to start is with the Secretary of State’s business filings online database. In Texas, you have access to the companies Certificate of Formation, annual Public Information Reports (PIR), and other filings they have submitted to the state. Review as much as you can. Have they ever had their business status revoked? Has the company been diligent in their PIRs? Has the ownership changed recently? These will give you a general overview of the company and can quickly screen out a poor acquisition.
Another great place to search is online reviews. Yelp, Google, and even the Better Business Bureau allow for customers to leave reviews about the service or products they have received from the business. Is there an issue with customer retention? What is the general customer satisfaction rating? Even if revenues are good, taking a peek at customer comments is a great way to see where the business is headed.
After a business has been determined to match your company’s culture and their history/background are satisfactory, you can dig into the financial review. The financial review will involve many documents and much time. The first place to start are the basic financial documents of the business: balance sheet, profit and loss statement, and the cash flow statement. You should review each of these carefully and also look at prior years statements. It is also recommended that the statements be audited by an outside auditor or CPA. Reviewing the financials of a business is necessary for any merger or acquisition. If a business does not have the financials or refuses to allow a review, drop the idea of a merger or acquisition and never look back. Sometimes a non-disclosure agreement is signed before the due diligence has begun, this is to protect both parties from legal liability that may arise from the review.
You should also review the business’s sales structure, customer service, contracts, employment records, and any real or intellectual property status as the merger or acquisition moves forward. Each of these can have a detrimental impact on the acquisition if not carefully considered. The financial review can take several months and should not be rushed or taken lightly. The more you know about your acquisition, the more likely it will be a successful purchase.
After the due diligence has been completed and the acquisition is ready to move forward, you will need to prepare the acquisition documentation and file the appropriate documents with the state. Corporate acquisitions with stock swaps or redemptions are not often used by small businesses because of the complexity and cost. The most often form of an acquisition for small businesses is the merger. There are two basic types of mergers: where two companies merger to form a new company (dissolving the prior companies in the process) and where two companies merge and one company survives the merger (and one company is dissolved in the process). Both will require that any real, titled, or intellectual property be transferred to the surviving or new company before dissolution or any prior company. Sometimes owners forget to transfer a piece of land or vehicle only to realize months later that they cannot legally make the transfer because the entity that owns it has dissolved.
A purchase agreement or plan of merger should be drafted that details the transaction. It should include information about the merging entities, which will survive, the new ownership percentages, the consideration received, any closing conditions, and other important elements to the merger. This will help guide the merger as it is completed. The Plan of Merger will often be filed with the Certificate of Merger with the Secretary of State. Other documents that are often required for the merger filing include: certificate of good standing from the Comptroller, statement of approval from each entity, and any amendments or restatements of the Certificate of Formation for any surviving entity.
After the acquisition, be sure to maintain the company formalities and file your annual tax and public information reports to keep the company active with the state. There are also formalities to undertake should you need to close the business.
A merger or acquisition is a major project for any company. It is always recommended to consult with experts when undertaking such a major project. Reidel Law Firm can help your business expand through a merger or acquisition for a flat fee. For your free consultation or more information about mergers and acquisitions in Texas, use the contact form below or call us at: (832)510-3292.
