When it comes right down to it, the following items are really what a buyer expects from a seller.

Financial statements.A close review of the financial statements is imperative to verify the authenticity of all the items, particularly inventory, receivables, and payables.

Assets.The buyer wants to be sure he is gaining full title to the assets, particularly as it pertains to items such as intellectual property and patents. Also, the buyer wants assurances that the machinery and equipment are in good working order.

Taxes.Not only is it critical to verify any tax liability if it is a stock purchase, but in the case of an asset purchase, the owner wants to be sure there are no liens on assets due to failure to pay taxes.

Employee relations.Employee contracts and employee benefits are important, even if it is an asset sale, because a new owner who knowingly, or unknowingly, takes away an employee's privilege walks into a hornet's nest.

Environmental.Many transactions in today's merger and acquisition business are being negated because of environmental liabilities. Leasing the premises instead of buying the property does not free a tenant owner from responsibility for any contamination caused before his or her arrival.

Pending and potential litigation.This becomes a bigger issue with a consumer product company just by existing in our litigious society. The seller will want to place a time period or cap on his or her total responsibility. Usually, the buyer ends up sharing some of the risk for previously made products.

Authorization.To sell the company from stockholders, directors, or third parties such as banks, the owner will require authorization. He will be expected to ensure to the buyer that all liabilities are represented; all contracts are disclosed; all wages, taxes, and insurance are current; and all bonus plans are disclosed.

While most of the burden for representations and warranties is on the seller, the buyer may be required to warrant that the acquisition does not violate their loan agreements or, if stock is to be used, that it is properly authorized. Obviously, if the transaction is a stock sale in which the buyer assumes all the assets and all the liabilities, the representations and warranties are more lengthy and complex. Often the buyer is only willing to undertake a stock transaction based on the tightness and thoroughness of the representations and warranties.

An M&A intermediary or business broker can help you be better prepared for the variety of information a potential buyer will want to see.

 

2. Operating Leverage:  the major focus in this type of acquisition is to improve profit margins through higher utilization rates for plant and equipment. A manufacturer of cardboard containers that is operating at 50% of capacity buys a smaller competitor. The acquired company's plant is sold, all but two machines are sold, the administrative staff are let go and the new customers are served more cost-effectively. Adding new customers without increasing fixed expenses results in higher profit margins.