Mergers and Acquisitions For Dummies (29 page)

Don't allow one intermediary to represent both sides. Representing both sides is a conflict of interest. Anyone who offers to represent both sides is inept and/or is acting in a highly unethical manner.

Lawyering up on both sides

Legal issues are always at the forefront. The lawyer is a very important advisor to both Seller and Buyer. Similar to the intermediary (see the preceding section), each side has its own lawyer. The lawyer should be someone who is well versed in M&A; only use an attorney who has actually engaged in M&A transactions.

The lawyers for both sides work together and craft the details of the purchase agreement. These agreements are very complex and often utilize arcane terms and phrases, so I can tell you from experience the best thing you can do is to let the lawyers do their lawyerly alchemy and craft a document they think makes sense. Stay out of their way, but always stay abreast of the situation.

Here's why you want to stay on top of what the lawyers are doing: Many law firms turn over the mind-numbing exercise of negotiating the myriad legal points to junior associates. These associates often can be sweet, caring, and utterly passive creatures. As a result, one lawyer will mark up the purchase agreement (called a redline”) and e-mail it over to the other side.

Redline
refers to an edited document that retains the edited text. Edited text is crossed out and the new text is easily identifiable because it's blue, green, or, surprise surprise, red!

The other side's junior associates, also sweet, caring, and utterly passive creatures, undo the changes and revert back to the original text. This passive e-mailing can continue
ad infinitum
because these passive creatures often prefer the easier e-mail route to having a conversation. Coincidently or not, this back-and-forth also results in running up the legal fees of Buyer and Seller.

Of all the advisors, lawyers are prone to try to take over the process. Keep your lawyer focused on negotiating the legal terms of the purchase agreement, and leave the negotiating on business terms to your investment banker. You're paying the lawyer, so don't be afraid the tell her to stand down.

Check out the later section “I'm the tax man!” for more on issues that fall under the jurisdiction of both the lawyer and the accountant. (And for more on accountants, head to the following section.)

Looking at accountants and auditors for Buyers and Sellers

Accounting is another issue that can cause a deal to crash and burn. Accounting may be a science, but the application of accounting, especially in companies utilizing family-accepted accounting principles (FAAP; see Chapter 8), can become an art. A capable accounting advisor is a must.

Accountants and their bean-counting brethren, auditors, are hugely important during the M&A process. Wading through enormous amount of data, especially financial statements, inventory reports, and bank statements, and then applying and double-checking arcane accounting rules, regulations, and conventions against that pile of data is mind numbing, dreadful work, so be thankful you have someone willing to do it!

Your fancy investment banker isn't going to sit still long enough to do all that counting, and your lawyer will provide you with dozens of equally boring legal reasons, replete with references, why he can't count up all the numbers.

Perhaps the best thing about accountants, beyond the fact that they gleefully jump into a world of monotony, is the fact that they don't complain and rarely try to hijack the negotiations. See the following sections for some duties accountants share with lawyers regarding taxation.

I'm the tax man!

In the not-too-distant past, the U.S. tax code contained more than 4 million words and almost 200,000 lines of rules, regulations, exceptions, exemptions, thinly veiled threats, overt threats, twists, turns, and a writing style that can make your eyes glaze over in massive pronoun confusion. Oh, and just for good measure, the code tosses around arcane and bizarre language like a sailing vessel slammed by a rogue wave of bureaucratic tomfoolery. So you definitely need the advice of a tax expert.

Taxes are the bane of doing deals. Yeah, they're a necessary evil, I get it, but of all the deals I've worked on that ultimately didn't close, taxes were the number one reason for the failed transaction. Sellers are often unaware of the full effect of the taxes their sales generate, so having a tax expert on the team helps insure the best-possible tax treatment of the transaction.

The issue of taxes straddles the expertise of the attorney and the accountant (see the preceding sections). Ideally, Seller works with an accounting firm that is large enough to have a dedicated tax expert on staff.

Tax evasion
(not paying taxes owed) is illegal.
Tax avoidance
(merely avoiding transactions or structures that trigger taxes or higher taxes) is not.

Recruiting more consultants to Buyer's team

Buyers may need to enlist the services of additional outside advisors including environmental consultants, database/IT consultants, and marketing consultants. However, these consultants are farther down the food chain and aren't part of every deal.

Technology

If the acquired company utilizes technology (such as the contents of a customer information database or some proprietary software designed and built by Seller) as any component of what Buyer is buying, Buyer should strongly consider hiring an appropriate consultant to test and confirm the strength of the technology. Testing the technology is important because many (if not all) of the decision-makers aren't computer programming experts. Bringing in an outside expert to test the software may be the only way to determine whether the software truly is as strong as Seller claims.

Marketing

Getting a marketing consultant's third-party opinion on a company's marketing strategy may make sense for Buyer as a way to determine where it can make improvements in marketing post-acquisition. However, using this report to argue for a price reduction is a dubious practice Buyers should avoid.

Environmental

Buyers should hire an environmental consultant especially if they're acquiring land and/or have reason to suspect the site of the business may be on contaminated land.

Responsibility for contaminated land is a hot-button issue as of late. The Environmental Protection Agency (EPA) can make Buyer's life miserable if it discovers after a transaction closes that land acquired as part of the deal has an environmental problem.

Some key questions the Buyer's consultant should ask include

What was the land used for prior the being home to Seller's business?
Specifically, was it a gas station, a recycling facility, or a manufacturing facility?

Were heavy metals previously fabricated on these premises?

The due diligence pertaining to land comes in two types of phases:

Phase I:
A Phase I is basically a review of records from local, state, and any pertinent regulatory agencies, focusing on the current use and past use of the real estate in question. The review includes photos, maps, and an examination of aerial pictures, as well any information pertaining to the local water table. A Phase I usually includes a walk-through of the premises and lands. The examiner is looking for tanks (oil, gas, chemical, and so on) and other visual evidence of some sort of problem or issue.