The buyer must evaluate its strengths and weaknesses. For example, if the buyer feels it has problems with its management infrastructure, it probably will not be able to spare the management time and skills necessary to learn and take over the operations of the selling company. If the buying company has a strong manufacturing operation, but is weak in sales or marketing, it probably should buy only those companies that have marketing strength.

The buyer must perform a complete financial investigation of the selling company. The tax and accounting results must be analyzed. What is the existing and what is the expected tax basis of the assets to be acquired? Will either the buyer or the seller be subjected to recapture of depreciation or investment or other credits? If so, the selling company may demand that the transaction be structured as a tax-free transaction. To qualify as tax-free, it must be a statutory merger or the sellers must be willing to accept voting stock of the acquiring corporation. This means the owners of the selling company must also investigate the financial standing of the buying company.

Regardless of whether the transaction is to be tax-free or taxable, the target company owners need to know if the acquiring company will be financially able to fulfill its obligations under the purchase agreements. This is particularly true if they are receiving stock or notes rather than cash.

The buyer should always determine why the seller is selling. For example, if the reason for the sale is because of a deadlock by the minority shareholders, then, so long as their interest is less than a third, the only viable means of sale will probably be through a statutory merger or an asset purchase. If the target company is selling is because its owners wish to retire, but the buyer needs their expertise until the transition is complete, then the buyer needs to think of structuring the deal to require an employment contract and a non-compete agreement for the sellers.

For additional information, please see the accompanying articles: [How Do You Buy a Company], [Asset Purchase], [Stock Purchase], [Mergers], [The Acquisition Agreement]

This informational memorandum from the law offices of Thomas D. Solomon, P.C. is provided as a courtesy to our friends and clients to provide them with items of interest in the corporate acquisition area. It is not and is not intended to be an exhaustive treatment of its subject matter, but rather an overview of some of the pertinent elements of such subject. It is not intended to be legal advice or a legal opinion and should not be relied on in making legal or business decisions. If you have any questions, please call us.