The nuts and bolts of buying and selling companies and assets.

• Author: Krosner, David R.
• Position: Brief Article

Throughout the current economic expansion, there has been a significant level of merger-and-acquisition activity. Part of that has been fueled by the mn-up in stock prices, as public companies use their stock as consideration for acquisitions. Also, many technology companies are completing acquisitions to accelerate their growth, eliminate competition or acquire needed technology.

With the recent downturn in the market and its recent disdain for initial public offerings of young technology companies, the pace of M&A activity may increase as public companies with deflated stock prices become more susceptible to takeovers and those seeking capital for expansion are not as able to access the public markets. In addition, acquisitions will always be utilized by companies to accomplish various strategic objectives, and sales will always be the most common means for business owners to cash out of their investments.

Accordingly, many business owners may soon find themselves involved in an M&A transaction. For those unfamiliar with the process, an acquisition can be intimidating. However, the process is fairly standard, and the following primer of the steps involved may alleviate unneeded anxiety.

Confidentiality agreement

When two parties desire to explore a potential transaction, the first document they should sign is a confidentiality agreement. Generally, before negotiations begin in earnest, the buyer will want to conduct an extensive due diligence examination of the seller. During that examination, the buyer will have access to sensitive information regarding the seller. The confidentiality agreement requires that the buyer keep that information and the fact that negotiations are in process, confidential.

Letter of intent

Before negotiating the final agreement, often the parties negotiate a letter of intent on major economic terms. Generally, the LOI is non-binding, except for certain sections such as confidentiality provisions and no-shop clauses. The LOI outlines the deal structure (such as asset purchase, stock purchase or merger), the purchase price and form (such as stock, cash or notes), payment terms and closing contingencies.

LOIs often contain no-shop clauses prohibiting the seller from negotiating with other potential buyers during an agreed-upon period of time. These clauses protect the buyer from expending the resources to negotiate a transaction only to have the seller turn around and sell to a third party. Before entering into a...