Starting the Acquisition Process – A Handful of Quick but Critical Tips

Aaron-GhaisThis article was contributed by Aaron Ghais, a deal lawyer at Shulman Rogers that has helped his clients buy, sell, and finance businesses, and has closed over 350 deals worth over $2.5 billion in the past 20 years.

So you’ve decided to grow your business by acquiring another business – but where do you go from here?  What do you need to be thinking about?  Worrying about?  Taking care of?  To get you started, here are a handful of tips – you can even call them “nuggets” of advice – that come out of real life experiences I’ve had in the course of completing many, many acquisitions over more than two decades:

Nondisclosure Agreement.
Most any Seller with trade secrets or other intellectual property will ask you to sign a Nondisclosure Agreement before telling you very much of value about their business.  There’s probably no getting around it, but here are a couple of thoughts:

  • Get the Nondisclosure Agreement reviewedby your legal counsel to be sure it’s not overbroad and don’t be afraid to negotiate the agreement’s terms with the Seller.
  • If you have concerns about your ability to comply with the agreement’s requirements (for example, because you are a serial acquirer and look at many dozens of companies each year), consider limitinghow long the confidentiality restrictions last.
  • And perhaps most importantly, put proceduresin place to prevent unintentional disclosures that breach the Nondisclosure Agreement.  Among other things, limit the number of people on your side who will have access to the Seller’s confidential information in the due diligence process; be sure that each of those people reads and understands the Nondisclosure Agreement; and even make each of them sign a separate agreement between your company and him/her prohibiting disclosure of the Seller’s confidential information and binding them indirectly to the Seller’s Nondisclosure Agreement.

Letter of Intent.
Not every deal has a Letter of Intent (LOI) and it doesn’t always make sense to have one.  In fact, don’t waste time drafting and negotiating an LOI until you and the Seller are roughly in the same “ballpark” when it comes to a purchase price.

Once you settle on a rough purchase price, though, it’s often wise to have at least a short LOI summarizing the proposed deal terms before you invest too much more in professional fees, time, and other resources.  What deal terms are most important?  Things like: purchase price; terms of any earnout, purchase price adjustment, seller financing, and treatment of indebtedness; desired tax outcomes; and whether executives will be asked to sign any employment agreements or noncompete agreements.

If you have a LOI, make sure it is fully non-binding if that’s your intention.  If you agree with the Seller that a portion of the Letter of Intent should be binding on you or the Seller, be express and specific about which portions are binding.  Be especially careful not to bind yourself accidentally to negotiate the proposed terms summarized in your LOI – in other words, preserve as much flexibility as you can to negotiate completely different terms than those described in the LOI, and even to walk away completely for any reason or no reason at all.

For the rest of Aaron’s tips, including a helpful list of steps to take during the due diligence process, read the rest of the article on the Getting Deals Done blog by clicking HERE.

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