International Deal Making – Assisting Acquirers

QUESTION ONE – In your experience, what are the key considerations that international clients should have the front of mind when assessing a target company for acquisition in your jurisdiction?

Understanding the Federal and State tax implications of the acquisition is essential to determining the proper US acquisition structure which, if managed appropriately, can result in tax savings to the client of over 20 per cent. These tax considerations include, not only how the acquisition funds will be eventually repatriated to the country of origin, but also any US taxes the international buyer may be subject to following the acquisition.

Certain assets, such as real property, equipment, and inventory, are subject to special tax rules which can further complicate the analysis and impact the ultimate decision making. Clients may also need to understand and plan for both business income taxes and US inheritance taxes.

Confirming compliance with local and state employment laws is especially difficult for international clients. Common areas of complexity which impact international clients include whether an individual has been correctly classified as an employee or independent contractor, and appropriate handling of workers compensation and occupational safety claims. It also involves understanding mass-layoff regulations, and compliance with (or exemption from) federal employee benefits laws. These matters all have significant business and tax implications for international buyers.

The regulatory framework applicable to each transaction varies and often includes international, Federal, State and even local implications. Working with professionals with a tailored experience to both the industry and the geographical area is key to adequately addressing and planning for these potential hurdles.

Blending international corporate cultures and practices with those of the acquired local business often complicates the transition process. In our experience, estab­lished international companies often acquire small US targets, many of which have informal corporate structures and working environments. The transition can be difficult for the buyer and the employees if not handled appropriately.

QUESTION TWO – How would you, as a professional advisor, approach the due diligence process to ensure all bases are covered prior to a sale price being agreed?

In the US market, buyers and sellers customarily enter into a Letter of Intent (LOI) prior to conducting detailed due diligence. The LOI, which is typically non-binding, often contains the purchase price or an established metric for determining the purchase price. In the absence of due diligence results that are significantly incon­sistent with the seller’s initial representations, the purchase price is typically fairly static. We advocate for a mechanism to adjust the purchase price to the extent due diligence results materially impair the value of the US target.

To ensure a thorough and efficient due diligence process, there are a number of important considerations:

Identifying the right due diligence team is important in all transactions, but espe­cially in cross-border acquisitions where the international buyer may not be familiar with local customs and operations. An experienced attorney and accountant are key to addressing the legal, financial and accounting due diligence matters. If real estate is a material part of the transaction, it will also be important to engage an environmental engineer, title company, surveyor and real estate appraiser.

The due diligence team must have a strong understanding of the target US company, its structure and its operations in order to properly tailor due diligence requests. General requests may not identify material concerns that are specific to the target company’s business, which could result in the inability to identify and address potential issues.

Before providing any confidential information, most US sellers require the buyer to execute a Non-Disclosure Agreement (NDA). Tailoring the terms of the NDA to the specific deal is key to avoiding an overbroad interpretation and the potential publication of private information, especially if the international buyer is considering a number of target companies within the same industry.

QUESTION THREE – Once an acquisition is agreed, what are the key clauses or warranties and indemnities you would recommend for inclusion in the sales contract?

In our experience, there is no one-size-fits-all acquisition agreement. The key pro­visions will vary based on the US target and the industry, but often include the following:

The proper structure of the acquisition is, in our opinion, the most important component of each transaction. While the majority of transactions we see in the middle-market are asset acquisitions, there may be a business (or financial) requirement that results in the purchase of stock or other equity. The ultimate decision will affect both parties’ legal obligations as well as their resulting tax position. The international buyer should also consider whether certain assets, such as real estate, should be acquired separately from the operating business in order to isolate potential liabilities.

All buyers prefer ‘security’ for a seller’s representations and obligations. Maintain­ing an escrow account for a period of time after closing or paying a portion of the purchase price through an earn-out provision (or other contingent consideration) are common mechanisms used to keep the seller ‘honest’ by ensuring that the seller continues to have a financial interest in the success of the business after clos­ing. These mechanisms motivate the seller to make more accurate representations and create an incentive for a successful transition to the new owner. In the past 10 years, the US market has seen an increase in the number of deals that include a cap on the seller’s post-closing liability, making these security mechanisms even more important for buyers.

Tailoring the representations and warranties to the seller’s business is typically one of the most time consuming and important aspects of a transaction. Representa­tions we see in almost every transaction include those addressing unencumbered ownership of the assets or equity to be purchased, compliance with laws and regulations including environmental laws, payment and filing of all federal and state taxes, the accuracy and completeness of financial statements, and employee benefits.

Tips for completing a successful cross-border acquisition

Successful cross-border acquisitions require perseverance, a good understanding of the local business and legal environment, and an experienced team of professionals. This helps to navigate not only the legal aspects of the transaction but also the financial, tax, real estate, intellectual property, engineering and other business aspects involved with operating in a new market.

Our most successful clients are those who have taken the time to find qualified local profession­als who are a good fit with their business and those who are willing to invest in a long-term relationship in a new and potentially very differ­ent market.

This excerpt was taken from the IR Global Guide: International Deal Making: Assisting Acquirers. To view the full publication, please click here.

Contributing Advisors