Mergers and Acquisitions For Dummies (88 page)

Refer to the purchase agreement and any confidentiality clauses that may prohibit you from speaking about the deal. Speak with your attorney if you are uncertain about what you can and can't say about the deal.

Typically, Buyer decides how much information to release to the media. Private companies making acquisitions of other private companies usually don't furnish the media with specifics such as revenues, profits, and price paid. Executives with public companies should consult with their advisors before making any written or oral public statements about the deal.

Announcing an acquisition can be a great way for a company to garner some free publicity.

Following Through: The Deal after the Deal

Very rarely do Buyer and Seller conclude a deal, walk away, and never interact again. Even though Seller has his money and Buyer has her company, the two sides usually have some post-closing issues to conclude. The following sections walk you through some of those matters.

Closing the loop on post-closing adjustments

One of the first items that need wrapping up after the deal closes is the post-closing adjustments. The closing day balance sheet often involves some guesswork, and the actual balances may not be available until a few weeks go by. Usually 30 to 90 days after closing, Buyer presents an actual balance sheet as of the closing date to Seller. The parties compare this balance sheet to the estimated balance sheet presented at closing and
true up
(adjust) any differences in working capital.

In most cases, the adjustments are relatively small in relation to the purchase price, and most adjustments can be made by adding or subtracting money from the escrow amount.

However, depending on how the purchase agreement is worded, one side may have to write a check to the other side. Buyer is usually the one writing the check; Sellers usually insist on having any downward adjustments made to the money in escrow rather than paying them out of pocket.

Wrapping up the contingent payments

Depending on the deal, contingent payments such as earn-outs, Seller notes, and Buyer stock may be part of the Seller's proceeds. In the following sections, I provide information on following up on these payments. Chap-ter 12 discusses the various contingent payments in more detail.

As a Seller, stay on top of a Buyer's obligation to you regarding contingent payments. If the Buyer owes you information about an earn-out or misses a payment on a note, speak with your legal advisors about the best course of action. I don't advocate being litigious, but you may have to sue if you exhaust all other options.

Maximizing the earn-out

Earn-outs can be the trickiest of all contingent payments. Seller is trusting Buyer provide necessary and accurate documentation regarding the specifics of the earn-out. The key to the earn-out is how it's crafted and defined in the purchase agreement (see Chapter 15). Simplicity is the best course of action; avoid using a complex formula for calculating the earn-out. The more complex the earn-out, the more calculations involved and the greater the chance Buyer and Seller will disagree.

For Sellers, the best chance at influencing the earn-out occurs if they remain with the company as an employee and have a direct impact on the earn-out metrics. For example, a Seller can impact an earn-out that's based on top line revenue if he stays employed in a sales position. But if the Seller is leaving the company after close, he probably has little or no control over the earn-out.

Collecting the note

If Seller agrees to accept a note, he becomes a creditor of the company, and Buyer is therefore legally obligated to pay that note (as opposed to an earn-out, which she may not have to pay if the company doesn't meet the metrics). Sellers should make sure the Buyer's books officially record any note.

As with an earn-out, a note is only as good as what you negotiate in the purchase agreement.

Dealing with the stock

The ability to sell stock received in an M&A transaction depends on a few factors: where it trades, any restrictions on selling it, and its
liquidity
or trading volume.

If the stock Seller receives is with a publicly traded company, he can sell the stock on the exchange where it trades after any restrictions are removed from the stock.

If Seller accepted stock in a private company, however, his ability to sell the stock may be limited. Not only may a market not exist for the stock, but Seller may also be expressly prohibited from selling the stock even if he could find someone to buy it.

Dealing with Disputes

If the post-closing matters in the earlier “Following Through: The Deal after the Deal” section proceed without incident (no breaches of representations or warranties, no claims to escrow), the escrow agent releases the escrow money to the Seller at the appointed time.

However, some deals don't proceed in an orderly and uneventful post-closing fashion; Buyer and Seller may have disputes. In the following sections, I give you some guidance on taking care of breaches and disputes that may arise after the deal closes.

A purchase agreement that doesn't lay out the process of adjudicating a disagreement is almost certainly inviting problems. Head to Chapter 15 for more on squaring away the purchase agreement.

Handling breaches

Breaches
(in other words, post-closing disputes between Buyer and Seller), come in three basic flavors: violation of noncompete and non-solicitation agreements, discrepancies with working capital, and breaches of reps and warranties. The following sections delve into these issues.

Violations of the noncompete and non-solicitation agreements

One of the biggest concerns a Buyer has is that the Seller will take the money from the sale and open a competing business across the street, perhaps even hiring (or attempting to hire) employees now working for the Buyer. Because of these concerns, most purchase agreements contain
noncompete agreements
preventing Seller from opening a competing business in a certain defined geographic area for a certain defined amount of time, as well as
non-solicitation agreements
barring Seller from hiring or trying to hire Buyer's employees.

If you as a Buyer suspect a breach of these agreements, speak with your attorney. The typical course of action in these cases may include going to court and obtaining a temporary restraining order.

Sellers, don't forget that Buyers effectively derive a portion of the purchase price from the noncompete agreement. Essentially, Buyer is paying you not to compete, so breaching this agreement may affect your valuation.

Discrepancies with working capital

As I note earlier in the chapter, M&A parties make adjustments to the purchase price a few weeks after closing, after the Buyer has an updated balance sheet for closing day. Sometimes, this balance sheet can be a source of disagreement between Buyer and Seller because the Buyer's calculations don't match what the Seller promised. In particular,
working capital
(the difference between quickly convertible assets, such as accounts receivable and inventory, and the bills that are due within 30 days, such as accounts payable) commonly creates disputes.

Some typical areas of dispute between Buyer and Seller include

Bad debts reserve:
Buyer may claim Seller didn't set aside a sufficient reserve against bad debts. In other words, the value of the accounts receivable wasn't as high as Seller claimed at closing.

Inventory valuation:
Buyer may claim Seller overvalued inventory and/or kept unsalable inventory on the books. Writing off inventory reduces a company's earnings, and if the valuation was based on some measure of earnings, Buyer could claim she overpaid for the business.