Acquisition Agreement

Description

The buying of one business or company by another business/individual/other entity, is known as an acquisition or takeover. Numerous methods exist for identifying specific acquisition targets, such as supply chain analysis, internal business unit reports, trade shows, and market research. “Acquisition” usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger and/or longer-established company and retain the name of the latter for the post-acquisition combined entity.

OVERVIEW

A typical acquisition agreement consists of a number of parts. Of particular importance are the representations and warranties, covenants and closing conditions, which all work together and interrelate with each other. The representations and warranties consist of a number of statements about the seller (or buyer) and its business, at the time the agreement is signed. The covenants portion of the agreement deals with the period between signing and closing. As such, at the time of signing it is a forward looking set of provisions which obligate the parties to take, or refrain from taking, certain actions. The acquisition agreement shall also contain (critically important) provisions setting forth the purchase price to be paid, provisions describing the stock, assets and/or liabilities being acquired and miscellaneous provisions including those relating to termination rights and their consequences.

ADVANTAGES

Tax Benefits: Tax advantages are provided to facilitate the smooth operation of businesses in nations where acquisitions are held. A nation gains tax advantages and creates new, better capital when it merges with another business. India is one of the few nations in Asia that provides businesses looking to establish themselves there with reduced tax rates.
New Opportunities: There are plenty of business opportunities in India if you’re an investor or businessman planning to enter the country but are having trouble finding a way to fund your venture. A person can save time and effort through mergers and acquisitions. Through structural modifications and appropriate documentation, a business can revitalize itself and enhance its overall value as a company.
Access to Skilled Labor: Due to the establishment of new businesses and the large population of India, there are more job opportunities than there are workers to go around. In the event of a merger or acquisition, the business will prioritize keeping its current workforce and completing all necessary legal requirements. Although there is a large pool of skilled labor in India, the opportunities do not match the demand that this restructuring can meet.
A diversified portfolio: Acquisitions provide access to a wealth of new products, services, and goods that can be leveraged to improve the company. It is advisable to proceed with acquisition services for a better company valuation. A recently established business will expand its access to a bigger market share and acquire more experience.
Access to a Greater Market: Given its size, India is a large country with a wealth of opportunities that come at an affordable price. If a business wishes to expand, it can invest in an Indian company to gain access to low-cost labor and more favorable tax laws that will boost productivity.
Greater financial control and influence: Acquisitions provide financial stability because the employees and resources are already in place; the only thing that needs to be changed is the organizational structure, which ultimately spurs the expansion of both businesses. Due to the domino effect, increased financial power will have an impact on consumers by reducing competition.

ESSENTIALS

Description of the transaction: It is necessary to specify the acquisition’s structure, the payment method, and the item being bought or acquired. It is necessary to identify the assets and liabilities. It is necessary to ascertain the nature of the acquisition, including whether an asset purchase, merger, or stock purchase is involved.
Representations and Warranties: By making the acquisition, the acquirer assumes a risk. Even the acquiree bears the risk of not receiving payment. As a result, it is wise for both parties to ascertain the risks and their circumstances by offering guarantees and assurances. Full disclosures must be given if there are any ongoing legal proceedings, compliance requirements, inventory, tax, employee-related, etc. It matters when the representations were made. The seller typically makes the representations, but occasionally the buyers might as well.
Conditions: Sets out everything that must occur before there is an obligation on the parties to close the deal.
Covenants: The parties undertake pre-closing and post-closing covenants or promises in order to facilitate the transactions. The parties agree in the pre-closing covenant to advise the buyer of any consent that must be obtained from internal and external regulatory agencies. There is a clear explanation of the prerequisites and limitations. The seller’s ability to, for example, negotiates contracts with other parties or provides information to prospective buyers is restricted. It’s possible that the buyer will have more time to match a higher bid.
Termination: How and when either party may end the transaction prior to closing and any consequences of walking away from the deal.
Indemnification: The risks and what happens in the event of a breach of covenants, withholding material information, making false representations or warranties, engaging in fraudulent activity, etc., must also be covered in the acquisition agreement. There is no need for indemnity in the event that the parties were informed of the covenant violation before the agreement was closed. However, if the buyer did not disclose the breach of covenant, they are still entitled to reimbursement for the loss.

FAQs

How to determine the value of the company that is being acquired?

The seller should hire a suitable, seasoned company to perform a valuation This company may or may not be the seller’s regular tax preparation and accounting firm. Including an “earnout” in the deal terms is one way to resolve a standoff between the parties if this is where they can’t agree. To put it another way, the seller will be compensated at closing based on the lower valuation, and if the business performs well after closing and the seller’s optimistic assessment proves correct over time, it will be entitled to further payments at a higher valuation.

How are payments made when a company is acquired?

Broadly speaking, the buyer can pay the sellers for the target company either by paying cash (usually by wire transfer) or by issuing stock/ownership interests in the buyer itself. Some or all of the payment of the purchase price can be deferred to a time after closing. But being paid in stock makes it more likely that the transaction can be structured to be tax free, meaning that the seller doesn’t have to pay taxes on receipt of the stock in this transaction, though it will eventually have to do so upon sale of the stock it receives.

Can an Acquisition Agreement be terminated without closing?

The agreement will contain provisions that allow the agreement to be terminated prior to closing, either by mutual consent of the parties, or by one of the parties alone under particular circumstances. Every agreement that contemplates a later closing, contains closing conditions, such as obtaining governmental approval of the transaction if applicable, or third party consents relating to the target company’s agreements.

Is it important to seek legal advice when forming an Acquisition Agreement?

Quality legal advice is essential for several stages of selling a business. If you decided to seek competitive bidding, you might want to draw up a confidentiality agreement to protect any commercially sensitive information. When you’ve reached an outline agreement you’ll want to put the main points of the deal in a signed heads of terms agreement, then get legal advice on the wording of the final terms.

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