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Mergers & Acquisitions

Nationwide Merger & Acquisition Attorneys

Whether you are ready to acquire, grow or sell a business, Penwell Law can help you.

Selling a Business

Businesses are about passions and legacies. You have spent years, perhaps decades, building a book of business, creating a reputation, and developing products and services that are useful to your clients and community. When you are ready to exit your business, we can help you maximize the value of the enterprise you’ve built and experience the satisfaction of passing the mantle to a new entrepreneur. Whether you hope to have the next generation of your family succeed you, or you’re looking to sell to a third party, we will help you develop a plan and support you from start to finish. There are numerous options for a successful sale, from handing over the keys on closing day, to staying on in a mentoring role during a transition period. There are even options for staying involved in a management role for several years and receiving additional compensation for meeting growth targets. Partner with us and we will help you determine what exit strategy works best for you.

Buying a Business

Not every entrepreneur wants to start from scratch. Buying an existing business allows you the opportunity to hit the ground running with an established client base, proven products and services, an existing reputation, vendor relationships and experienced employees. In some cases, the seller will even stay on for a period of time to teach you about day-to-day operations and best practices. 

Buying an existing business is also a good option if you’re looking to expand your current book of business or client base. Share your goals with us and we will help make your business plans a reality. 

Wherever you are based, whatever business you’re in, we’re ready to help. We support businesses nationwide, large and small, in all different types of industries and stages of growth.

Types of Mergers and Acquisitions; Options for Financing Transactions

No two transactions are the same. For that matter, no two businesses are the same. We listen carefully to our clients’ goals and problems to provide customized solutions. If you are looking to buy, grow or sell a business, below are some transaction options to review as your starting point. When you’re ready to take the next step, we’re here to help you.

The Process for Preparing a Transaction

Corporate transactions are complicated, even if you’ve been through the process before. It is difficult to juggle the demands of a complex deal with the day-to-day operation of your business. 

At Penwell Law, we firmly believe the key to a successful transaction is planning and a clear roadmap. We want to know your vision at the outset so that we can effectively advocate for you and streamline the transaction process. Below are some points to consider before buying, selling or merging a business.

Have a Clear Sense of Purpose

What do you hope to accomplish? Does your company need to make capital improvements? Are you looking to expand your customer base? Do you want to explore new service or product areas to increase revenue? Alternatively, if you’re selling, what do you want that exit to look like? Do you picture yourself still working a couple of hours a day? Do you want to mentor the new owner? Or are you looking to hand over the keys and move on to a completely new chapter in your life? Our team wants to know as much as possible about your ideal outcome.

Financing & Raising Capital

Most buyers do not have the cash up front to purchase a business. Financing for an acquisition typically takes the form of a business loan from either an institutional lender or seller financing. Seller financing means that the seller will accept the purchase price in installments over a set period with interest. In both the case of a business loan and seller financing, the assets of the business will normally serve as collateral to secure the debt. It is incredibly important that both parties pay attention to the details of the financing documents, as they will impact the business for years. Important details include whether the interest rate is variable versus fixed, what circumstances qualify as a default, and whether the lender is first in line or subordinate to other lenders and restrictions upon business activities. Business owners sometimes unwittingly take out loans that restrict their ability to sell assets without clarifying that they may sell their inventory as part of their daily operations. By allowing our team to focus on these details at the outset, you are making an investment in your business for the long term.

As an alternative to traditional financing, buyers may seek to raise capital by selling interests in the business to investors.  Whether you choose traditional financing or wish to raise capital, Penwell Law is here to help.

Negotiations & Letter of Intent

Typically, you will engage a broker to help you identify a purchaser for your business or seller/target for acquisition. We are happy to recommend brokers or to work with your existing broker. Once you have identified a potential transaction partner, the next step is to draft a letter of intent (or “LOI”). The LOI is typically non-binding and sets forth the key terms of the proposed transaction like the purchase price, working capital requirements, transition services, handling of real property/leases, expectations for representations and warranties, and indemnification limits. Our team has extensive experience in drafting and reviewing letters of intent. We know what to look for and what to ask for in order to ensure you get the best terms possible.

Due Diligence

If you are selling your company’s assets or equity, you will need to provide copious amounts of information, including several years of financial statements, tax returns, company meeting minutes and resolutions, customer files, insurance loss runs, contracts, intellectual property registration information, a list of tangible assets (like office furniture, equipment and inventory), leases or title information depending on whether you rent or own your office space, relevant permits, lists of accounts receivable, and disclosures regarding potential liabilities, like lawsuits or customer complaints that could potentially escalate. 

If you are buying a company’s assets or equity, then you need to request and review the above information. 

Regardless of whether you are the buyer or the seller, due diligence can be overwhelming. At Penwell Law, we walk you through it, step by step. We take as much of the burden of due diligence off of you as possible, so that you can continue to focus on running your business.

Drafting the Transaction Documents

The primary documents in an M&A transaction are the purchase agreement and the disclosure schedules. The purchase agreement builds upon the letter of intent, setting forth the previously agreed-upon terms with a much more nuanced level of detail. Ideally, the seller discloses all relevant information about the business to the buyer through the representations and warranties sections. The disclosure schedules tie to these representations and warranties by offering the seller a place to provide further explanations and exceptions without breaking up the flow/readability of the purchase agreement. For example, if the purchase agreement states at Section 3.3 that “There is no litigation relating to the business except as set forth in Schedule 3.3,” then the Seller will provide the details of any litigation on that schedule. Sellers should always err on the side of disclosure, as these help to avoid costly legal battles after closing.

In addition to the purchase agreement and disclosure schedules, M&A transactions typically also include what are known as ancillary documents. Examples include items like a Bill of Sale (which allows the buyer to show third parties that ownership has transferred without having to provide the full purchase agreement, price they paid, etc.), officers’ certificates and resolutions (which establish that each party is authorized to enter into the transaction and that the relevant shareholders or members and the officers or managers have approved it), and employment agreements for the staff who will transition post-closing.

Key Deal Terms: What You Should Know

Drafting effective documents requires a clear understanding of each party’s goals. Given that most people have not been through an M&A transaction before, we make it a point to educate our clients regarding critical deal points and their ramifications. Setting expectations at the outset of an M&A transaction avoids misunderstandings and costly legal battles later. Below are some key concerns for both buyers and sellers:

Not every buyer can afford to pay the purchase price in cash. In addition to determining the length of the loan and interest rate, the parties need to determine the extent to which the assets or stock of the business will serve as collateral if the buyer defaults. Lenders typically wish to record liens against the assets of the business via UCC financing statements. Such liens put other parties on notice that if such parties lend money to the business, they will be subordinate (meaning second or even third or fourth in line) to collect the cash and other assets of the business in the event of a default. This can make it difficult for the business to obtain additional loans, which may be needed down the road to make capital improvements or expand. 

Some lenders may also seek a personal guaranty from the borrower and their spouse, which means that if the business defaults, the lender can pursue personal collateral, like the equity in the borrower’s home and personal accounts. 

From the seller’s perspective, if they are providing seller-financing (i.e., accepting the purchase price in installments), they may want to ask not only for collateral (and perhaps a personal guaranty), but for a pledge agreement as well. A pledge agreement establishes that if the buyer defaults on the loan, then all, or a portion, of the buyer’s ownership interest in the business will transfer to the seller.

Sometimes the seller will be offered a chance to retain equity in the business, i.e., hold back a percentage of their ownership interests. The parties should decide in advance if this entitles the seller to actively make decisions about the business post-closing, or alternatively, if the retained equity is meant to provide a passive interest only. If passive, the seller can expect to share in profits but not to have decision-making power. However, many states mandate that equity ownership of any kind entitles the holder to certain minimum voting rights. For example, the consent of passive owners may be required to dissolve the business. Both buyers and sellers need to think through the ramifications of retained equity prior to close and ensure they understand the minimum rights afforded equity holders under their particular state’s laws.

The purchase price is not always paid entirely in cash. Sometimes, buyers will offer stock/equity in affiliate or subsidiary companies as consideration. Sellers should carefully review their rights as a post-closing investor in such companies, as there are often restrictions on their right to sell and limited voting rights. In addition, if there is more than one class of stock (i.e., Class A Stock and Class B Stock), distributions may not be made equally among all stockholders. For example, Class B Stock may not be entitled to any distributions until the Class A stockholders have been repaid their principal in full, plus a certain return on their investment. 

Additionally, the company may have significant debts that must be repaid before distributions can ever be made to stockholders. Both buyers and sellers should pay attention to these nuances. Sellers run the risk of being sued for misrepresentation if they fail to disclose relevant details and downsides. On the other hand, buyers who gloss over the details may be left with buyer’s remorse and little recourse if they fail to read the documents provided. At Penwell Law, we seek to avoid these negative outcomes by providing a thorough review and meaningful explanations to our clients.

If the seller is staying on post-closing to assist in running the business, there may be contingent consideration in the form of “earn-out.” Under this scenario, the buyer sets revenue or other performance-based goals for the business for a year or more following the transaction. This is mean to keep the seller engaged and motivated. If the goals are met, the seller receives additional compensation, sometimes in the form of cash and sometimes in the form of stock/equity. What appears at first glance to be a simple concept can become thorny for both the buyer and the seller if concepts like gross versus net revenue aren’t negotiated in advance. We have also seen instances where sellers are surprised to find that revenue from subsequent acquisitions are excluded from the earn-out revenue calculations. Like many issues in M&A, this falls under the you-don’t-know what you-don’t know category. Often sellers reading through earn-out agreements on their own will miss these potential issues because they’re simply not address in what they’re reading. At Penwell Law, we look both for existing problems in the document, as well as problems created by what is missing.

One of the main reasons entrepreneurs want to buy an existing business is that they can hit the ground running with operations, employees, customers and revenue in place. Part of that strategy includes having enough money on hand at closing to pay for the typical expenses of the business for at least the first month or two, i.e., the “working capital”. Buyers want to know how much Seller typically spends on rent, vendors, employee salaries, supplies, insurance, software and any other products or services necessary to operate the business. Working capital is calculated by subtracting current assets from current liabilities on the company’s balance sheet. However, averaging the working capital over twelve months may not be wise, as certain months may be more cost-heavy than others. If for example, certain pricey license registrations come due every May and the closing is on May 1st, the buyer should make sure they have adequate funds to meet such expenses, in addition to the more normal monthly costs. Similarly, buyers should scrutinize monthly revenue trends in case there are months that are typically lower or higher in revenue throughout the year. You can imagine a perfect storm for a buyer wherein they set the working capital based on a twelve-month average and then close in an atypically low-revenue, high-cost month. Once the working capital target is set, buyer and seller should work together to determine what cash, accounts receivable and other liquid assets will remain in the business at closing to meet the target. If the buyer is concerned that there may be a shortfall, they should push to set up a purchase-price escrow account to fund the difference.

Buyers use the due diligence process to learn more about the business they are buying. They want to know about profits and losses, whether there are debts, the customer base, employees, operating expenses, the office or retail space and whether it is rented or owned, what contracts are in place, and they want to get an idea of the relative stability of the company. For example, are the customers satisfied or has there been growing discontent? Have employees recently threatened to leave? Have there been lawsuits against the company? If production is involved, how old is the equipment? If real estate will transfer with the business, how old is the building and what kind of shape is it in? These and other questions drive purchase price negotiations and help the buyer to make a well-informed decision. Some buyers may thrive on the challenge of turning around a business in distress. Others may want to avoid risks at all costs and buy a business in turn-key condition. The critical element is disclosure. Seller should not hide business flaws and risks, both ethically and because they may be liable after closing for making misrepresentations. 

In order to ensure that the information provided in due diligence is correct and not misleading, the seller will make a series of representations and warranties in the purchase agreement. Below are typical examples:

  • The business is in good standing in the state where it was formed and has the full power and authority to run as currently conducted.
  • The governing documents provided in due diligence are up to date and accurate.
  • The seller(s)/owner(s) have the authority to sell the equity or assets of the business, including clean title.
  • The company and its assets are not encumbered by debt and/or liens (or such debts and liens will be paid off in full at closing.)
  • The sale of the business will not cause a breach of the governing documents or a contract with a third party or governmental agency.
  • The sale of the business will not cause the revocation of permits.
  • The contracts to be assumed by the buyer are legally binding, in full force and effect, and can be effectively transferred to buyer. (If prior written consent is required, that should be flagged during due diligence.)
  • The financial statements provided in due diligence are accurate and not misleading. They do not omit pertinent information.
  • There haven’t been any recent events negatively affecting the business, such as customers threatening to take their business elsewhere, employees threatening to leave, vendors substantially increasing their prices, or other material changes.
  • There is not any ongoing litigation and there hasn’t been any litigation in recent years.
  • The business has paid all of its taxes.
  • If the business owns real property, seller should disclose the condition of that property.
  • If property is rented, the terms of the lease should be disclosed.
  • The list of employees is true and accurate, including all of their salary info, length of employment and classification as exempt or non-exempt.
  • All benefit plans provided are up to date and accurate.
  • The business is insured and the policies provided in due diligence are up to date and accurate.
  • All necessary permits are in good standing and can be effectively transferred.
    All material contracts were provided in due diligence and copies of such contracts are true and correct.


*Note that while the buyer will also make representations and warranties, they will be more limited. For example, the buyer will typically represent that they are either an adult with the capacity to enter into the transaction or that the entity buying the business is in good standing and authorized to enter into the transaction. The buyer must also represent that their execution of the transaction will not result in a violation or breach of their governmental documents or any material contract. Buyer may also represent that they have reviewed the disclosure schedules and the information provided in due diligence and made their purchase decision based upon their own investigation of those materials.

Most sellers in reviewing the representations and warranties listed above may be able to think of exceptions and disclosure issues right away. If all of those exceptions were listed directly in the purchase agreement, it would be difficult to read. (Imagine trying to jump from one section to another with 100 pages of financial statements in between.) Instead, most representations will include a reference to a separate disclosure schedule. For example, Section 5 of the purchase agreement may state, “Except as set forth on Schedule 5, there has been no litigation during the five (5) year period prior to the closing date.” Other schedules may simply provide a spot to attach particularly relevant documents from due diligence. For example, “Financial statements for the three (3) year period prior to the closing date are provided at Schedule 6.”

The concept that one party must defend another against claims and reimburse them for such costs is called indemnification. Typically, in an M&A transaction, the buyer wants to be indemnified by the seller for losses and damages caused by the seller’s pre-closing actions or misrepresentations regarding the state of the business. While in some transactions, indemnification obligations are unlimited, in others the parties negotiate for a “basket” and a “cap.” The basket is the threshold amount of losses and damages that a buyer must incur before the seller is obligated to indemnify them. The “basket” prevents the seller from being nickel and dimed by the buyer for de minimis problems post-closing, like a copier machine unexpectedly breaking down. A “tipping basket” establishes that once the damages reach a certain amount, for example $10,000, they are entitled to full recovery from the first dollar (i.e., if the damages come to $10,001, they are entitled to $10,001, not just the $1 over the threshold amount.) You can think of each dollar accumulating in a basket until it tips over and becomes the seller’s problem in its entirety. A “true deductible basket” is essentially the opposite and means that if the damages are $10,001, the buyer is only entitled to the excess $1 once the threshold is reached.) 

The “cap” is the upper limit of the seller’s responsibility to indemnify the buyer for losses and damages. It is important to note that in both the case of baskets and caps, these limitations will not apply in cases of fraud or intentional misrepresentations. In addition, the buyer may push for “fundamental representations” to be exempt as well. Fundamental representations are those representations that the buyer and seller agree are most critical to the deal. One way to think about “fundamental representations” is if the buyer knew at the outset that these particular representations were not true, they would not be willing to buy the business. Often, there is overlap between the breach of “fundamental representations” and fraud. For example, it is fundamental to the deal that the seller actually own the business and have the authority to sell it. If it turns out this representation is not true, the seller has committed fraud, in addition to breaching a fundamental representation.

Sellers often worry that the buyer will not retain adequate cash from closing to pay for an indemnification claim if one arises. One way to address this is by setting an up an indemnification escrow account. Typically, the escrow account is funded at closing with part of the cash purchase price. The parties negotiate as to the amount and length of time that the cash should be escrowed. Sellers may push for an indemnification escrow amount to match the indemnification cap. However, buyers typically want the amount to be lower because the escrow account ties up their cash proceeds, often in a non-interest bearing account. In terms of duration, sellers push for the longest term possible, while buyers push for the shortest.

In addition to indemnification escrow accounts, the parties may also set up purchase-price adjustment escrow accounts. In transactions where there is a working-capital target, buyers often request that all or a portion of that target be held in escrow to address any shortfall. For example, if the seller represents that the business will have $100,000 in working capital at closing, but there is in fact only $90,000 in working capital at closing, the remaining $10,000 would be withdrawn from the purchase price escrow account and transferred to the buyer. As with the indemnification escrow account, the buyer’s fear is that seller may not retain sufficient funds post-closing to make up the difference.

No buyer wants to purchase a company only to have the seller open an identical business next door. Restrictive covenants typically protect the buyer in three ways: (1) Non-competition provisions, which establish that the seller will not set up a competing business within a certain geographic range of the business, for a certain period of time; (2) Non solicitation provisions, which prevent the seller from poaching customers and employees, and (3) Confidentiality provisions, which prevent the seller from disclosing private company information to third parties. The scope and duration of restrictive covenants are subject to negotiation, and state law varies as to their enforceability. In this regard, it is important to note that courts treat restrictive covenants associated with the sale of a business differently from those imposed in the context of an employment agreement. Even states that are generally hostile toward restrictive covenants tend to honor them more liberally in the context of a business sale.

What are some common challenges in mergers and acquisitions?

Not every transaction is as straightforward as you might like. Sometimes, you are faced with a slew of challenges as your business buys, sells or merge with another company. Here are some of the most common challenges faced during the M&A process:

  • Disagreements over how to divide up pre- and post-closing liabilities. In an ideal world, a business would change hands with no issues. In the real world, any number of things can happen post-close. Critical machinery breaks. Key employees leave. Customers bring lawsuits for events that transpired years ago. The questions that follow are: Who is responsible? Who pays? The general idea is that the seller protects the buyer from liabilities for pre-close activities and the buyer protects the seller from liabilities for post-close activities. We refer to these types of obligations as indemnification. Parties can break up indemnification duties in a variety of way, including introducing dollar thresholds and caps and carving out exceptions for certain intentional or reckless acts. 
  • Employees & third parties. Timing is the key to both life and M&A deals. Sellers must decide how and when to tell employees that the business is changing hands. In some cases, employees may choose to leave rather than work for a new owner. In the case of key employees, this can cause the deal to unravel. The same goes for third parties, such as where a contract or lease requires written consent for assignment. 
  • Inefficient adoption of new policies 
  • Incompatible company cultures 
  • Employee retention 
  • Leadership changes
  • Lack of adequate support channels

Are mergers and acquisitions the same?

While mergers and acquisitions are similar concepts, they aren’t exactly the same. During a merger, two separate businesses come together to form a single, new entity. On the other hand, acquisitions involve one company purchasing the assets or equity of another company.

Do all corporate mergers and acquisitions require shareholder approval?

Corporations have shareholders. Partnerships have partners. Limited liability companies have members. The concept among the three structures is the same. Owners, whether you call them shareholders, partners or members, typically have the right to vote on significant transactions. Whether a majority vote or unanimous vote is required depends upon the governing documents. Corporations are governed by their bylaws, while partnerships have a partnership-agreement, and limited liability companies have an operating agreement. In some cases, the owners may also have separate agreements called member or shareholder agreements, which specifically outline each owner’s rights in the case of a sale. Sometimes, owners may have rights of first refusal. Minority owners may retain veto rights in the case of a sale of substantially all of the equity or assets in the company. The parties can agree upon just about any division of power and voting rights, so long as it is permissible under state law. 

Notably, it is not just the selling owners who must give permission for a transaction. The owners of the purchaser often need to provide their consent as well (unless the governing documents specifically delegate such power to the managers or officers.)

Is conversion the same in every state?

Every state has different policies and procedures when it comes to converting from one type of company to another. For example, the members of a limited liability company may want to convert the entity to a stock corporation in anticipation of going public. A mutual insurance company may wish to convert to a stock insurance company in anticipation of being acquired by another stock insurance company. There are a lot of possibilities, and most conversion goals are attainable so long as you follow the detailed procedures provided by each state’s applicable statutes.

Do I need tax clearance for the conversion? If so, what do I need to provide with the filing instrument?

Every state is different in how it handles taxes and corporate conversions. For example, Texas asks businesses to attach a Tax Clearance Certificate from the Comptroller of Public Accounts. Once we know the details of your situation, Penwell Law can determine the need for tax clearance and work with your CPA to file the proper documents.

Contact the Penwell Law Team!

We’re here to walk you through all the options for buying, selling or growing a business. No transaction is too big or too small. We routinely handle transactions in excess of $10 million, but we’ve also assisted clients with $5,000 acquisitions. For us, it’s not about the deal size. It’s about helping our clients achieve their goals. Contact us today for a no-cost consultation. You can also book a no-cost consultation directly with any member of our team here: