As an entrepreneur, one of the biggest decisions you'll make is the decision to realize returns on the investments that you and your early investors had made in the business. Now, one way of doing that is to buy or sell your business, in some type of business combination transaction. In this lesson, we're going to talk about that very thing, buying or selling a business. The objectives for this lesson, is one to go over some of the high-level pros and cons of selling or buying a business. Then we'll talk a bit about the common types of business purchases. First, you have an asset purchase, and then you have equity purchases. They take two forms, a stock purchase or a merger. Finally, we'll spend some time talking about the merger process. Let's get into the different pros and cons of buying and selling a business. From the positive standpoint, business combinations are a good way to liquidate your interests in a business, and it gives you immediate liquidity. If you're trying to realize or capitalize on the returns on the investments you made, selling or combining with another business is a good way to do that. It also allows you to get access to additional capital, to employees, and talent. It also allows you to make strategic alliances so that you can either further your business or to grow your business in areas that you otherwise would not be able to do. Also, business combinations is one way to achieve some of these liquidation goals without going through the substantial cost and diligence requirements that are associated with other forms of exiting. For example, taking your company public. Now, business combinations also have their drawbacks, to that I want to highlight in this lessons are first by selling your business, you can potentially limit the investment return for your shareholders at the time of selling the business, that of fixed value for those shares, and it cuts off potential future growth of that interests. There's a potential drawback there. Also, when you sell your business, you lose control of the business because you're selling that business to a third-party company who will now control the future of the business. In along with losing control of the business, you potentially can also jeopardize the long-term vision of the company that you started as an entrepreneur. You should keep those drawbacks in mind as you're thinking about the potential selling of your business. Now let's talk about the forms of business combinations. As we said in our statement of objectives for this lesson, they take two general forms. First is the form of an asset purchase, and secondly, equity purchase and equity purchases further take two forms. One in the form of a stock purchase and secondly in the form of a merger. Let's jump into asset purchases. In an asset purchase, the acquiring company purchases some or all of the assets of the target company. In that scenario, the acquiring company is the company that's buying assets, and a target company is a company that is selling assets. Now, in an asset purchase, the acquiring company is not only purchasing some or all of the assets, but that acquiring company is also assuming liabilities that go along with those assets from the target company. It's not just a matter of purchasing assets. You're also purchasing the liabilities that go along with those if you are the acquiring company. That's important point to keep in mind if you're considering an asset purchase. First, the timing that it would take to close the deal. If the acquiring company is choosing which assets they want to acquire, which liabilities they want to assume, you can imagine the amount of negotiation that must go back and forth between the parties in order to finalize that type of an agreement. Therefore, that process can be very attenuated and can take a little time to finalize. That's one thing you want to keep in mind. Also, if you're on the target company side, if you're the company that's selling assets, it could have a potentially adverse tax implication for the shareholders of the target company. For example, the shareholders of the target company can be taxed once at the corporate level, and then be taxed again on the distribution of the net proceeds from the asset purchase. If you're in a target company position, those tax implications are thoughts that you want to keep in mind. Also another point to point out when we're thinking about a potential asset purchase, is the rights and obligations that the target company and the acquiring company may have to third parties, to parties that are outside of the deal. A good example of this is what we call a non assignment clauses. Most contracts, the parties have an agreement whereby one party cannot assign its rights in that agreement to someone else without the consent of the other party. If you aren't acquiring company and you're buying an asset from a target company and that asset is the subject of a contract between the target company and some other company, you have to resolve all of those obligations between the target company and that third party before closing the asset purchase deal. Now, as you can imagine, getting all of those consents can really slow down the process of closing the asset purchase deal. In some cases that can completely derail the process. Particularly if the acquiring company or the target company is concerned about the transaction becoming public, that could derail the whole process. It's another issue to keep in mind. Also, depending on the company that is acquiring or selling assets, if you're not purchasing all of the assets of the target company, you may require certain levels of shareholder approval from the target company to purchase some subset on the assets. That's an issue that you will keep in mind during the diligence period as you're negotiating the asset purchase deal. Now let's talk about equity purchases. Now, as we said, there are two types of equity purchases, stock purchases and mergers. But generally speaking, equity purchases are more favorable to the target company or the shareholders of the target company, than an asset purchase. As we said, when an asset purchase, the target company's shareholders may be subject to adverse tax implications. Also, equity purchase because they're not assets and liabilities that go along with those assets, because they're just equity interests in the company, these deals can be closed relatively quickly because oftentimes there's no need for third party consent. You don't have to go through these third parties, these other companies who aren't part of the deal, you don't have to go to them to get consent to finalize the deal. Sometimes that can speed up the process. But extensive due diligence is required particularly to ensure that the acquiring company is aware of all of the liabilities that's associated with the target company. Because if you're doing a merger, all of those liabilities, will follow the acquiring company. Let's talk specifically about stock purchases. In a stock purchase, the acquiring company agrees to buy all of the outstanding shares of the target company. Then the agreement is typically between the acquired company and the shareholders of the target company, because the shareholders are who are really selling their shares. But oftentimes the target company as an entity is also a party to that stock purchase agreement. Now, as an acquiring company, if you're not going to acquire all of the stock of target company, then you'll need unanimous shareholder approval. Otherwise, you'll have to do a merger in order to acquire the remaining stock interests in the company. Now let's talk about mergers. Mergers are essentially transactions that combine two businesses into one. In order to affect your weight or to close the deal on a merger, oftentimes you'll need approval from the board of directors of both companies, and the approval of the majority of shareholders of both companies. There are three types of mergers that I want to highlight for you in the context of this lesson. First, is a forward merger. In a forward merger, the target company, so the company that's being bought, so to speak, mergers into the acquiring company. The acquiring company remains as the final entity, but the target company is merged into it. The second is what we call a forward triangular merger. In that instance, the target company mergers into a subsidiary of the acquiring company. At the end of that type of merger, the acquiring company remains and the subsidiary of the acquiring company remains, but the target company is now subsumed by that subsidiary. Finally, the third type of merger that I want to highlight is what we call a reverse triangular merger. In that scenario, a current subsidiary of the acquiring company, mergers into the target, and then the target remains as a result of that merger. As a result of a reverse triangular merger, you have the acquiring company and you have the target company which is now resumed what formally was a subsidiary of the acquiring company. A merger process is, in addition to getting approval from the board of directors of both companies and the majority of shareholders of both companies, the process is a very detailed process and one that can take a lot of time. Let's step through some of the highlights of that process. First, before a merger agreement process gets kicked off, both parties typically enter into preliminary agreements. There are two provisions that you should be sure as an entrepreneur that you consider including in these preliminary agreements. The first is confidentiality. Confidentiality requires both parties to keep the communications about the merger confidential. This is very important because if the idea that these two businesses are going to combine or are exploring the possibility of combining, if that becomes public or widely known, it can very much derail the process. You want to make sure that both parties are agreeing to put stringent confidentiality requirements early on in the process. The second is exclusivity. This essentially means that if we are exploring the possibility of combining these two businesses, then each party agrees that they want at the same time, explore the possibility of combining with some third party outside company, a company that it's not part of this deal. That's important to ensure that both parties are focused on really exploring the possibility of combining and not having their interests divided and other possibilities during that time period. Once the preliminary agreements are agreed upon and in place, the parties enter into a period of due diligence. This is essentially where both parties get to learn everything about each other, the business practices, the assets, the liabilities, the financials. You want to learn as much as possible so that you're making an informed decision around whether you want to combine or not to combine. Once the parties have gone through this due diligence period, the agreement gets memorialize into what we call a letter of intent or sometimes we refer to it as a term sheet. This is essentially an agreement between the parties to combine under specified conditions. One of the things I want to point out here is that it's very important to think about what terms in that letter of intent or the term sheet do you want to make sure is binding? Now wow, the letter of intent itself as a whole is not a binding agreement because it's not final yet. You want to insist on some terms to mean bindings so that both parties are motivated to continue the process towards a final agreement. Once you continue the process, the parties final agreement will be memorialized in what's called a merger agreement. This is the final agreement between the parties to combine the two businesses. After the merger agreement and only after the merger agreement is finalized, will you make a public announcement that these two businesses have combined. In summary, business combinations or buying or selling a business, they come in two different forms, an asset purchase or an equity purchase. An equity purchases take two forms, a stock purchase or a complete merger of the two businesses. If you're thinking about a merger, remember you want to have your preliminary agreement around confidentiality and exclusivity, go through an extensive due diligence period, reduce your agreement to a letter of intent or a term sheet specifying particular terms that you want to be binding at that time. Then eventually this gets memorialized in to a merger agreement. These are all important steps for any business combination. Keep that in mind. Then finally, if you're thinking about buying or selling your business, you should always seek professional legal advice before pursuing any business combination.