Merger & Acquisition Strategies

Contact Neufeld Legal PC for corporate transactional and legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

When acquiring an existing business enterprise, it is imperative to engage knowledgeable professionals early on to identify strategic and tactical opportunities that may be available to optimize potential commercial and financial opportunities from corporate mergers, acquisitions and divestitures. After over 25 years of corporate transactional legal work, the delay in engaging legal professionals has serious financial consequences those business parties, as they failed to take advantage of potential opportunities to strengthen their transactional position and gain that much more out of the particular business transaction, as they had effectively conceded certain strategic opportunities without their knowledgeable that could have been financial advantageous. And whereas many of these strategic and tactical opportunities are particular to the business deal specifics, there are some general strategic aspects that will also need to be considered in most mergers, acquisitions and divestitures.

A. Transaction Structure: Share vs. Asset Purchase

The most fundamental strategic decision is whether to buy the company's shares or its assets. This choice has major implications for risk, tax, and complexity.

• Share Purchase: The buyer acquires the company in its entirety, including all assets, liabilities, and legal obligations—known and unknown.

  • Pros: Generally simpler and less time-consuming as contracts, licenses, and permits remain with the company.

  • Cons: The buyer assumes all liabilities, which makes due diligence absolutely critical. If the company has unknown tax liabilities or legal claims, the buyer becomes responsible for them.

• Asset Purchase: The buyer cherry-picks which assets (e.g., equipment, inventory, intellectual property) and liabilities they want to acquire.

  • Pros: The buyer can avoid unwanted liabilities and risks. The tax treatment of the assets can also be more favorable for the buyer.

  • Cons: This process can be more complex, as it requires the individual transfer of each asset and the assumption of specific contracts, which may require third-party consent.

The seller often prefers a share sale due to potential tax benefits (like the lifetime capital gains exemption), while the buyer typically prefers an asset purchase to limit exposure to unknown liabilities.

B. Due Diligence: The Foundation of Strategy

Thorough due diligence is the most important strategy for mitigating risk in a private acquisition. It involves a deep dive into the target company's operations, finances, and legal standing. Due diligence should be conducted across multiple areas:

• Financial Due Diligence: Verifying financial statements, assessing cash flow, and identifying any hidden liabilities or overvalued assets.

• Legal Due Diligence: Reviewing corporate records, key contracts, litigation history, and compliance with all laws.

• Operational Due Diligence: Assessing the company's business model, customer base, supply chain, and management team to identify integration challenges and opportunities for synergy.

• Tax Due Diligence: Examining tax returns and records to uncover potential tax-related risks, such as unpaid taxes or issues with past tax filings.

C. Negotiation and Deal Terms

Negotiating the terms of a private acquisition requires strategic thinking beyond just the purchase price.

• Purchase Price: The price is often a multiple of the company's earnings (e.g., EBITDA). However, the final price is determined by the negotiation and can be influenced by factors like market position, growth potential, and the results of due diligence.

• Earn-outs: A portion of the purchase price may be made contingent on the target business meeting certain performance milestones after the acquisition. This aligns the seller's interest with the buyer's long-term success and is a key tool in bridging valuation gaps.

• Representations and Warranties: The seller provides a series of factual statements about the business in the purchase agreement. If these statements are later found to be untrue, the buyer can make a claim for damages. Buyers often seek to limit the seller's liability by negotiating caps and baskets on these indemnities. Representation and Warranty Insurance is a common tool in Canada that can transfer this risk to an insurer.

D. Integration and Post-Acquisition Management

The success of an acquisition is ultimately determined by how well the two companies are integrated. A solid post-acquisition plan is a critical part of the overall strategy.

• Cultural Integration: Merging two corporate cultures can be challenging. A successful strategy involves early communication, identifying key cultural differences, and developing a clear plan to align values and work processes.

• Operational Integration: This includes combining systems (IT, accounting), consolidating supply chains, and streamlining redundant functions to realize anticipated synergies and efficiencies.

• Employee Retention: Retaining key employees and management is crucial. Retention bonuses, new employment contracts, and clear communication about their future roles can help prevent the loss of critical talent and institutional knowledge.

When it comes to the legal component of corporate mergers & acquisitions, that is when the law firm of Neufeld Legal P.C. comes into play. Such that when your company is seeking knowledgeable and experienced legal representation in orchestrating and completing business mergers, acquisitions and divestitures, contact us at rong>403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.

Merger and Acquisition Strategic Motivations: Mergers and acquisitions are driven by the corporate leadership's desire to increase their corporate entity's financial performance, with the strategic motivations of the parties to the particular transaction being driven to various purposes that have a considerable influence on how the transaction is approached and the pricing for that particular deal. Read more.