Formation and Maintenance of Business Entities
Two companies may decide that combining business activities will enhance performance and decrease cost. One of these companies may be significantly larger than the other and while the envisioned end result may seem ideal to both sides, the smaller entity will certainly have to be very careful as to how the sale is structured. The larger entity will have its size as leverage and the smaller entity will have more nuanced factors as leverage of its own.
Whether a merger or acquisition involves the purchase of an entity or the purchase of assets belonging to that entity is a critical distinction that must be carefully evaluated. In some cases, purchasing the entity may be practically necessary for the continuity of the existing business. In other cases, the entity that is the target of the purchase may have liability the buyer can potentially avoid by not purchasing the entity, but rather, its assets.
Caveats such as potential set-offs in the sale price, remaining liability on the sellers and liability passing to the acquiring company must be considered. Tax ramifications must not be overlooked. The employment security of key employees (and owners) must be considered and possibly secured during the transaction. The unique predicament about these transactions is that for the purpose of the transaction, the two parties are negotiating against one another; and yet, after the transaction, they will most likely work together as one unit. Therefore, the tone of the negotiation and due diligence is as critical as its content.