Acquisition Time - Selling Your Baby (Company)
You’ve done it! You had a dream, turned it into a reality, and somewhere along the way it became clear that others appreciated your product or service. While some companies keep the same ownership in perpetuity, and others may “go public”, many companies are acquired, and acquisition will be the focus of this Post.
Acquisitions happen at all stages of a company’s life cycle. Some companies are acquired simply because their idea is great; others because their idea has one component that is essential to another company’s needs; and others because it is clear to someone that the company will be quite profitable if acquired. These are just a few motivations for acquisition, and while the motive may vary greatly, the process tends to have many similar steps, and while this Post does not go into each and every item of an acquisition, hopefully it will give you a good starting point if you are ever approached about your “baby”.
Verbal Negotiaions
Most acquisitions start with some verbal negotiations. No surpise here.
Term Sheet
Following those verbal discussions, most acquisitions won’t jump straight to a contract phase. Instead you can expect a “Term Sheet” that reduces these big-picture items to writing. Term Sheets are generally fairly short and more easy to understand than a formal contract. Term Sheets generally provide big-picture items such as Parties, Purchase Price, Asset(s) to be acquired, Payment Schedule, etc. Much of the Term Sheet will be what you have verbally discussed most likely. Similar to verbal agreements, Term Sheets SOMETIMES enforceable. But many times parties to a Term Sheet will stipulate that the Term Sheet is “Non Binding” - meaning that the Term Sheet is meant to make sure the Parties are on the same page before time and resources are dedicated to the acquisition.
Contract - Asset Purchase Agreement
Once the Term Sheet is “finalized”, the Parties will likely have an Asset Purchase Agreement drafted. This is the starting point for the official contract. It will contain the information from the agreed upon Term Sheet, but will include so much more. If you have not used an attorney prior to this stage, it is prudent to utilize counsel to examine the Asset Purchase Agreement. Whereas a Term Sheet might be 2 – 5 pages, an Asset Purchase Agreement generally runs more like 10 – 50 pages (conservatively). And this document does tend to be fully binding, and contain damages provisions.
An Asset Purchase Agreement will have countless sections, but the focus of the remainder of this Post will be dedicated to the Representations and Warranty section. These sections will provide the information that you, as the Seller, are guaranteeing to the Buyer. For example, “There are no outstanding legal claims against the company…”, is a common clause in an Asset Purchase Agreement. So, if you do not know the answer or have something (like a lawsuit) that you cannot guarantee does not violate the terms of this section, what do you do?
Exhibit “X” - Disclosures to “Section Y: Representations and Warranties”
When a Seller cannot guarantee everything contained in the Representations and Warraties (of the Seller) section, the Seller will need to create a disclosure document, in which the Seller will disclose any piece of information that renders the Seller unable to “represent” or “warrant” to this section.
The Seller would go item by item and disclose EVERY item. For example, the Disclosure document might read, “Seller does not have or does not know to have any outstanding legal claims or threat of legal claim against the Company. Seller however does not own the trademark rights to its logo that has been in use for five years, which could result in adverse legal action.”
A disclosure of this nature could absolve the Seller of future liability in the event that the Buyer or New Owner of the Company faces legal action brought by the owner of a similar trademark that alleges infringement of its rights.
While the Disclosure Document feels like an admission of guilt at times, you should always work with a professional to determine what information is required for disclosure. Trust me, it is better to disclose this information before an acquisition than to hide it from the Buyer and risk voiding the contract or incurring significant liability/damages in the future.
Miscllaneous Items
Another highly important thing to watch out for in your Asset Purchase Agreement are the unique things you may have negotiated. For example, are you going to retain an interest in the company soon to be owned by the Buyer? Or will you be a service provider following the Acquisition? While these may seem like items that won’t apply directly to the Asset Purchase Agreement, these items are generally attached to the Agreeement and should be acknowledged as such. For example, if you are to be an Advisor for 6 months following the acquisition, and you are to be compensated for this role, and this is something important to Seller and Buyer, then you will likely want to include a Service Provider Agreement as an exhibit to the Asset Purchase Agreement.
Do not make the assumption that because the Asset Purchase agreement is signed and everything went smoothly that everything will go smoothly for the duration of your relationship with the Buyer. If there is something that is agreed upon, make sure that it is discussed and accounted for in the Asset Purchase Agreement, its Exhibits, and/or there are executed documents that properly reflect the situation.
Closing Thoughts
Thank you for tuning in. This Startup Series barely scratches the surface of each item discussed, but the hope is that you gained something from each Post. As always, if you have any questions or want to dive deeper into any topic discussed, please don’t hesitate to contact Williams Law. Email Info@Trentwilliamslaw.com or give us a call at (615) 422-7031. Cheers!
