A business merger occurs when two separate businesses join together to become one single business or to create a group of companies. The new business entity should benefit in a number of ways, for example:
- Saving production costs
- Improving economies of scale
- Knowledge sharing and utilising intellectual property rights
- Attracting new investment
- Exploiting accreditations
- Increasing client base
- Building a stronger and larger business
What are the drawbacks with a merger?
Whenever 2 businesses come together, 2 businesses who are used to operating a certain way now have to consider the views of a second party. This inevitably leads to some initial disruption as it is extremely unlikely that there will be a meeting of the minds with every business decision.
Not only will there be some challenges at management or ownership level but there are also employees to consider and of course the professional costs associated with planning for and implementing a merger.
How can business disruption be minimised during a merger?
Whilst a merger will inevitably mean some business disruption, there are steps which you can take to minimise this risk.
(1) Planning
All successful and smooth transactions start with careful planning and clarity on what will happen, when it will happen and how it should happen.
The starting point is to agree a value for each company party to the proposed merger and for each party to take taxation advice on how the merger should be structured. There are a number of tax advantageous schemes that can be utilised so professional advice should be sought to ensure any reliefs or schemes are utilised.
(2) Timescales
It is imperative that all parties are realistic on timescales. The legal documentation can be drawn up over a relatively short time period but if any valuations require HMRC clearance this will take some time.
More importantly, the operational side to the merger can take the most time. Agreeing suitable dates for notifying clients, employees, key suppliers, banks will take time. If there are any properties owned or leased by either company, arranging for these assets to move into the right legal entity also takes time.
(3) Funding
If any finance is required for the merger, this needs to be arranged at the earliest opportunity as the lender’s requirements can hold up transactions, particularly if they are not fully apprised of the terms of the deal.
(4) Professional Support
Enlist the support of experienced legal and financial professional advisors at the earliest stage so that you will be able to access help and support when you need it.
What documents and contracts are required?
Both businesses need to know as much as is possible about each other and this process, known as due diligence, should be undertaken with the involvement of your professional advisors. Both parties to a merger will want to know as much about the financial, operational and risk position of the other. For example, the following will need to be prepared for the other party to review:
– Information of all loans, charges and borrowing
– A full itemised list of assets
– A full list of any hire or lease agreements
– The employment matters including pension schemes and any outstanding employee claims
– Existing business contracts
– Insurance
– Tax history
Once due diligence has taken place, solicitors will draft a “Heads of Agreement” which, although not usually legally binding, is an important starting point for the timetable, structure and drafting responsibilities for each party’s solicitors.
Once heads of terms are agreed, solicitors will prepare the merger documents and liaise with the accountants to ensure the timetable is met.
To access professional and experienced legal support for acquisitions and mergers, contact one of our solicitors in Bristol. Please contact Grant McCall, Director, who will be happy to help. Email grantmccall@amdsolicitors.com or by telephone on 0117 973 39 89.
