Mergers & Acquisitions: What Every CEO Should Know About Selling a Company

Authored by James Chapman, Partner at Foley & Lardner LLP

Our current economy is characterized by fear, uncertainty, and doubt, with competition remaining fierce. The market for mergers and acquisitions is similar. In 2010, mergers and acquisitions activity improved and seemed to gain momentum, leading to a strong first half in 2011. According to Price Waterhouse Coopers, in the first five months of 2011, there were 1276 announced transactions with a total value of $454 billion, representing a 39% increase in value over the same period in 2010.

There were a number of notable transactions in 2011 including AT&T’s acquisition of T-Mobile, Google’s acquisitions of Motorola Mobility, Microsoft’s purchase of Skype, Intel’s acquisition of McAfee, and others. However, merger and acquisition (“M&A”) activity in the third quarter of 2011 seemed to taper off as unemployment in the U.S. remained stubbornly high and other bad macroeconomic news became public.

As a result of these factors, 2012 was viewed as a potential banner year for merger and acquisition activity. Unfortunately, by the third quarter of 2012, such optimism had faded. In addition to the continuing struggles in the U.S., the European debt crisis and problems in China were also slowing activity. And in light of a stagnant market for initial public offerings, a sale of the enterprise is sometimes the only viable exit strategy available to a company.

The sale of a company is a complicated process, often the end result of years of hard work by an entrepreneur. Like any endeavor that carries significant financial risks, proper planning is critical for the success of any sale of a business. It is the objective of this chapter to help the entrepreneur understand the current trends and dynamics in the M&A market and guide the reader to an understanding of the drivers of valuation, the critical steps in the sale process, the various legal issues involved, the options available to the seller, typical deal breakers, and commonly made mistakes to avoid. For the purposes of this chapter, the words “seller” and “buyer” are used to mean not only individuals but corporate buyers, sellers, and owner/operators as well. Privately held companies are those corporations that do not have stock trading over public stock exchanges.