Mergers and acquisitions are all about change. In these transactions, corporations or parts of them change hands. They may be purchased outright, or they could be combined with another entity altogether. Mergers and acquisitions are complicated deals with lots of sensitive parts. Typically, some human resources issues need to be worked out in addition to practical concerns.
On the business side, too, there are also many complicated considerations. It’s hard to structure an M&A deal in a way that makes all parties happy. Common problems that can arise in working out a deal include method of payment, non-compete and non-solicit agreements and closing conditions.
There are two major forms of payment when it comes to mergers and acquisitions. The first is cash. This is generally the preferred form of exchange for an M&A deal. Cash is liquid and ready to use. For the party being acquired, it’s the clearest and safest form of payment. Sellers also love it because it eliminates the need for contingency payments.
Mergers and acquisitions can also be completed by using equity. This is much more complicated. The payor transfers their equity to stockholders in the target company. The value is calculated using a ratio. Using equity can be good for buyers. Essentially, it makes it easier for them to get financing at a later date. Using equity also makes it easy to structure deals creatively.
Non-compete and non-solicits are agreements that keep the shareholders of the company being acquired from competing with the purchasing entity. Non-competition is fairly self-explanatory. Non-solicitation means an agreement to not attempt to poach clients. There are restrictions on these agreements. They have to be limited in time and purview. Consideration also needs to be provided for these agreements.
It can also be challenging to come to an agreement on closing conditions. This portion of the contract spells out all the conditions that must be met before the deal can be considered complete. These can be laid out in a letter of intent, but often, they’re negotiated later in the process. Closing conditions can include things like securing approval from a board of directors. Another example of a closing condition is the stockholder vote level needed for a deal to be approved.