3 Common Legal Mistakes Companies Make During Mergers and Acquisitions
Mergers and acquisitions are a normal part of business, and companies choose to merge with others in order to grow and be profitable. In fact, the process is so effective that 1.46 trillion USD was spent on mergers and acquisitions in 2017, an impressive number but just a shadow of 2015’s value, which hovered, right around 3.8 trillion. Some companies choose to merge with others in order to expand their market reach, while others wish to grow their customer base. Larger corporations may acquire smaller ones in order to eliminate competitors, while others may do so to leverage economies of scale. While the ultimate goal is to increase profits, there are common mistakes companies can make that may lead to the exact opposite: profit loss. In this post, our Mobile business litigation attorneys discuss common critical mistakes business makes during mergers and acquisitions and steps they can take to help the transaction go more smoothly.
Failure to Perform Due Diligence
You would not hire an employee, make a large purchase, or make a critical business decision without first performing the necessary research and envisioning the overall “big picture” of said decision, so why would you acquire a company without first understanding all that there is to know about it beforehand? Before you purchase a business, you should understand everything there is to know about it, such as what is owned, borrowed, or leased, the nature of its financial standing, what liabilities and assets it owns, whether or not it is party to any material contracts, whether or not it has any intellectual property you should know about, and much more. An experienced Mobile business litigation attorney can help you perform your due diligence and ensure that when you do decide to purchase a business, you are not in for any rude surprises.
Failure to Establish a Seller Non-Compete Agreement
One of the most devastating mistakes you can make when purchasing a business is failing to establish a non-compete agreement. Without a legally-sound non-compete agreement, there is nothing stopping the seller from opening up shop around the corner from you. Because of the owner’s ties to the community, there is a good chance that his or her new business will see rapid success while your acquired business sees a significant decline in regular sales. Do not fall victim to this sort of scam and work with a knowledgeable contract lawyer who understands Alabama non-compete laws and who can help you draft an enforceable restrictive covenant that will protect your business for a specified duration and within a set geographical scope.
Failure to Establish a Favorable Purchase Contract
As a party to the acquisition, you may understand exactly what type of outcome you hope to achieve from the agreement, but do you have an idea of the type of outcome you do not want? For instance, you may acquire a company because it holds the patent to a highly successful design formula. However, once the deal is done, you discover that the business owner is not required to disclose the formula, and that you are liable for any outstanding debts that the company acquired. To prevent an undesirable outcome, work with a business attorney who can help you draft a favorable sale agreement that outlines who is responsible for what and which party gets to walk away with what assets, including real estate, intellectual property, and trademarks. Accompanying the purchase of a sales agreement should be any essential documents such as deeds, a copy of the office lease, copies of employee contracts, an inventory of assets, and more.
Retain the Help of a Knowledgeable Mobile Business Lawyer
At Cloud Willis & Ellis, our attorneys are familiar with the common pitfalls of mergers and acquisitions and are available to help businesses in the Mobile, Birmingham, and Hoover areas properly address those pitfalls so that they can avoid them. If you are interested in merging with or acquiring a business, do not set anything in stone until you have spoken with a lawyer. Even if you have already drafted an agreement, an attorney can review it in detail and ensure that every aspect of it is fair and serves to advance your bottom line.