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Denver Business & Commercial Law Blog

How can a business practice due diligence when being acquired?

Whether a business is a few years, or a few decades old, it might be time for it to transition into a new phase by being acquired. Acquisitions are a period of change, but it can often mean bigger and better things for the company itself. So how can a company get itself ready for this transition?

One aspect of an acquisition process that an acquired business will want to attend to is due diligence. The acquirer will check off items on a list, formally, or informally in order to determine if the acquired property meets the valuation or to compare it to the existing structures, and business activities of the larger company. There are several topics of which smaller items of interest can be explored when doing due diligence in a merger or acquisition. Organization, financial information, physical assets, real estate, intellectual property, employees, licenses, environmental issues, taxes, and so goes the list, are all aspects that are important and need to be assessed through due diligence.

More growth, mergers expected for cannabis industry in 2019

Within the last several years since legalization in Colorado, the cannabis industry has seen impressive growth. With growth, comes a rapid speed of change in any industry. Generally made up of smaller businesses, the cannabis industry seems to be gaining speed towards larger, consolidated businesses. This is characterized by mergers and acquisitions.

Larger, more established businesses tend to acquire or merge with smaller businesses, such is the nature of the free market. However, entering into a merger or acquisition isn't a small feat. Understanding timing and market fluctuations is pertinent to any industry, including cannabis, in order to ensure the process is favorable and a smooth transition. When companies merge or consolidate, every aspect of that business needs to be blended and will come under scrutiny.

Choosing the best formation for your business

Choosing the correct legal formation for a new business is crucial. This choice will have major legal and financial implications for the future. It will determine not only the amount of taxes owed, but also whether or not the business qualifies for certain types of funding.

There are 15 common types of business formations, each with its own purpose and structure. An experienced business attorney can discuss a new business set-up and plan with an owner to determine the most beneficial type of legal formation. A single owner or married owners, unincorporated business is known as a sole proprietorship. It does not require registration with a Secretary of State, and it comingles personal and business assets.

Questions to ask when considering buying a business

When considering the purchase of an existing business, asking the right questions is crucial. It is here that you will find pertinent information to the current health of the business, as well as its future potential. So what should you ask?

First, delve into the financials. Ask questions such as, "Can I see your financial reports for the last 3 years?" or "What has been your sales percentage increase and profit each year?" Having this information will allow you to project future profits. If a current business owner refuses to provide financial information, it can be a red flag that there are some issues below the surface.

When can I sue for breach of contract?

If you are a small business owner, you are probably surrounded by more contracts than you realize. Between clients, customers, vendors, contractors, loans and purchase agreements, you have likely signed on the dotted line more than a few times. Unfortunately, you have also likely had to deal with other party not holding up their end of the bargain. So when does it reach a point where you can actually do something about it?

There are several situations in which a contract is considered to be breached, or in layman's terms, broken. However, in order for a court action to ensue, there must be what is known as either a "material breach" or an "anticipatory breach." A material breach is also known as a total breach. It takes place when a contract is irreparably broken and defeats the purpose of signing the contract to begin with.

What is a hostile acquisition?

The business world can cause many serious events and decisions. Most of us have heard the term "hostile takeover," whether in a movie or in real-life. This action is also known as hostile acquisition, and is often a complex, uncomfortable matter. By definition, the word hostile means unfriendly, antagonistic and opposed. In other words, it's usually not much fun.

A business is experiencing a hostile acquisition when another entity is attempting to takeover by way of shareholder vote. Management of the target business does not want the takeover to happen. Therefore, the acquiring company will make moves to bypass top management and obtain approval from shareholders. In a publicly held company, shareholders vote on members of the governing board. Just as easily as they may vote a member in or request removal, they may also choose to allow another company to takeover altogether.

Business formation includes obtaining licenses and permits

Many entrepreneurs in Colorado will decide that they want to open their own small business. Part of the business formation process includes obtaining any necessary federal and state licenses and permits. These licenses and permits are required by law if the activities the business engages in are regulated by federal or state agencies.

Various federal and state agencies require certain businesses to be licensed. For example, if a business is involved of the manufacturing, wholesale, import or sale of alcoholic beverages including beer, wine and liquor at a retail location, then that business must obtain a license from the Alcohol and Tobacco Tax and Trade Bureau and the Local Alcohol Beverage Control Board. Or, if a business is engaged in importing or transporting plants, biotechnology, biologics, animal products or animals, then that business must obtain a license from the U.S. Department of Agriculture. Some examples of businesses that may be regulated by the state include businesses in the construction industry, restaurants and retail stores.

How can a business in Colorado counter a "tender offer"?

It is not unusual for small businesses in Colorado to be interested in growing their enterprise. One way to do this is through a merger and acquisition. There are a variety of types of mergers and acquisitions. One type of acquisition is a "tender offer."

A tender offer is a type of acquisition wherein one corporation submits an offer to purchase another corporation's outstanding stock. Shareholders are made aware of the tender offer through advertisements and mailings. A tender offer is a means for one corporation to acquire another, via having a controlling interest in the corporation through corporate shares, while bypassing the management of the corporation being acquired.

Negotiating business contracts can be complex

Businesses in Colorado negotiate contracts every day. It is hoped that through these negotiations the parties can reach an agreement that they are both satisfied with. However, negotiating the details of a contract can be a complex endeavor, as both parties want to secure some sort of benefit from the agreement and neither party wants to see their rights or interests violated.

For example, when it comes to purchase and sale agreements, each side wants to benefit from upholding their end of the contract. Mergers and acquisitions are also business transactions that require a carefully drafted contract to be successful. And, when it comes to employment contracts, the employee will want to ensure they are being treated fairly both during and after employment, while the employer will want to ensure its interests are protected while the employee works for them and if the employee leaves the company.

Negotiating a small business merger

There are many business dealings that take place every day in Denver and throughout Colorado. One of the most complex transactions a business can undertake is a merger and acquisition. A merger takes place when two or more businesses combine, creating a single entity. Mergers allow both parties to benefit financially from their respective strengths and resources. There are numerous issues that will need to be negotiated to make the merger successful.

The companies merging will need to determine what legal structure the new entity will take. Will it be a corporation? A limited liability company? Or something else? The parties to the merger will also need to decide on how to combine management, executives and their respective boards of directors. Sometimes, to avoid redundancies, some workers may need to be let go.


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