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Why you need an attorney familiar with M&A when buying or selling a business

For most people who are buying or selling a business, the transaction is something that happens once in a lifetime. For these people, the legal aspects of the transaction may seem like a simple matter of “contract law” (whatever that is). Any attorney in the Yellow Pages can draft a contract, right? Technically, they can, but it would be wise to make sure the attorney representing you in a business acquisition or sale understands all of the various legal disciplines involved in these transactions.

At a minimum, all M&A transactions involve an element of risk allocation. A competent M&A attorney negotiating the terms of a business transaction will understand the various liabilities that may arise from the structure of the transaction and the various representations and warranties being made by the parties. Structuring a sale as a stock (or other form of equity) acquisition versus an asset acquisition will certainly change the allocation of risk. But within those possibilities, various aspects which are specific to the business and its relationships with its vendors, customers and lenders also change the landscape of the relative risks associated with the transfer of the business ownership.

Tax aspects of the deal structure can be very complex. If an M&A attorney is not intimately familiar with the tax repercussions of the deal structure, another tax expert (such as a CPA) should certainly be consulted during the negotiation of the structure and the allocation of the purchase price. Understanding the differing rates at which capital gains versus ordinary income will be taxed, and how the terms of the Purchase Agreement will impact that classification, can change the amount of money actually changing hands in the deal by thousands of dollars without actually changing the purchase price. Differences in the depreciable life of fixed assets for tax purposes will have a similar impact on the finances of the deal for the buyer.

Real estate is often involved in M&A deals. While it is not uncommon for residential real estate deals to close without any input from an attorney, commercial and industrial real estate transactions are often much more complex than a home purchase. Understanding environmental issues, ALTA surveys, title insurance policies, the priority of various tax and creditor liens, and a variety of other issues is essential to ensuring that the real estate portion of the deal is properly addressed. A good M&A attorney should be someone who is regularly involved in commercial real estate transactions.

There are a variety of other considerations involved in buying or selling a business which are specific to the business and the industry in which the company does business. The more mature the company, the greater these other considerations tend to be. Employees, pension plans, intellectual property, exposure to litigation, and other complexities tend to emerge as the business ages and grows. Complexities also arise when the business is in distress, such as having its loans called by a bank or having a Bankruptcy filing lurking.

While any attorney can draft a contract, the due diligence and detailed term negotiations which are often present in business acquisitions and sales go well beyond the scope of forming a binding contract which puts a purchase price into writing. An attorney who is not experienced in these deals has many things to consider which may be outside of his or her areas of practice.

The attorneys at Penzien & McBride, PLLC have extensive experience in buying and selling businesses. We have served as lead counsel in these deals, consultants on the tax aspects of deals being handled by other counsel, and have litigated the terms of deals when post-closing disputes arise.

If you are contemplating buying, selling or starting a business in Michigan, contact the attorneys at Penzien & McBride, PLLC to see if your transaction fits within our areas of core competence.

(586) 690-4400 or m.mcbride@penzienlaw.com

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