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Identifying the Essential Legal Documents in the M&A Process for Lower Middle Market Businesses

When it comes to mergers and acquisitions, particularly in the lower middle market, detailed legal documents govern every aspect of the transaction. At Dean Street Law, we've honed our expertise through handling billions of dollars in transactions, making sure that each deal is built on a solid legal foundation. In this post, we explain the essential legal documents that are critical to the success of any M&A deal and share strategic insights to manage them effectively.

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Core Legal Documents

Every M&A transaction, whether it’s a stock purchase, asset purchase, or merger, relies on multiple documents. Understanding these core documents is key to navigating the complex landscape of M&A:

  1. Letter of Intent (LOI): The foundation of your transaction outlining the preliminary agreement between buyer and seller.

  2. Purchase Agreement: The cornerstone document that details the terms of the purchase, from price adjustments to liability allocations.

  3. Employment Agreements: Essential for retaining key talent post-acquisition.

  4. Non-Competition and Non-Solicitation Agreements: Protect the value of the newly acquired business.

  5. Seller Note: Address financial terms of any seller promissory note.

  6. Consents: Gain necessary approvals from relevant parties.

Legal Documents for Asset Purchases

For asset purchases, you have to legally transfer each asset class in accordance with how that asset class may be legally transferred. Therefore, since each asset class has to be transferred separately, generally you will need a bill of sale for the transfer of personal property, and a lease or deed for the transfer of possession or ownership of real property. Also needed are the assignment and assumption of contracts for the transfer of contracts, assignment and assumption of licenses or benefit plans, assignment and assumption of intellectual property for the assignment of intellectual property, and more. These legal documents will depend on the various types of assets that the target company holds.

Legal Documents for Stock Purchases

For a stock purchase, there has to be a contract transferring the stock, membership interests, or other equity interests in the target company. This may be a stock power transferring the stock certificates in the event of a corporation. It may include changing or addressing any other shareholders' rights agreements and the organizational documents of the business. If it's a limited liability company, then it may be an assignment of membership interests or limited liability company interests. Generally, there is also a resignation of the board if it's a corporation or management if it’s another type of entity to change the control of the business, unless the buyer wishes to retain certain persons and they desire to continue. There may or may not be a resignation officers associated with the transfer of the business, depending on whether the buyer intends for them to stay on with the business. Other documents may be necessary as well, such as a FIRPTA certificate or certain other regulatory requirements.

Our approach at Dean Street Law always starts with a comprehensive understanding of the transaction’s needs. For instance, a client recently benefited immensely when our tailored closing checklist caught a critical oversight in asset classification, saving them significant expenses. This level of detail underscores the importance of each document and its direct impact on the transaction’s value.

Common Overlooked Documents

There is so much more to a transaction than just the purchase agreement. The purchase agreement is essential and necessary, absolutely, but you cannot successfully complete an acquisition solely with a purchase agreement. One of the biggest things that I see people overlooking, is the need for additional transaction documents beyond the purchase agreement. It typically requires at least ten to fifteen transaction documents at a minimum to complete an acquisition or divestiture. We are very proactive when we're drafting the purchase agreement and transaction documents to make sure that we are best representing our client.

I also see a lot of people underestimate the amount of time that it takes for the seller to review the purchase agreement and transaction documents. Typically this takes a minimum of two weeks, but can take more than a month, and it's important to build that into your transaction timeline. That's why I like to say that the first 30% of the transaction timeline should be focused on due diligence, but after that, it is really important to get started on drafting the purchase agreement and ancillary documents. As a buyer, it is great to include in the letter of intent that your council will be drafting the documents because whoever holds the pen holds the most negotiating power in the transaction.

Evolving Legal Landscapes

The landscape for M&A documentation is constantly evolving. As regulatory environments and market dynamics shift, new document types or variations on the standards may be necessary. Staying ahead of these changes is crucial for maintaining the legality and efficacy of the transaction.

In M&A, thorough preparation and expert management of legal documents highly impacts your likelihood of success. At Dean Street Law, our goal is to equip you with the insights and tools needed to navigate this complex field confidently. For more in-depth analysis and personalized advice, explore our Acquisition Insights course, where we delve deeper into each essential document and offer real-world strategies from our extensive experience. Apply to work with us to help make sure your next acquisition is built on a foundation of legal excellence.

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