Question 1

What is the difference between a merger and an acquisition?

Accepted Answer

A merger combines two companies into a single entity, with one company absorbing the other or both forming a new combined company. An acquisition occurs when one company purchases another, with the acquired company often ceasing to exist as an independent entity. Under California Corporations Code Sections 1100-1113, mergers require board approval and typically shareholder approval by majority vote. The practical differences affect tax treatment, regulatory requirements, and liability succession. Our M&A attorneys help California businesses choose the optimal structure based on tax efficiency, liability management, and business objectives.

Question 2

What is the difference between an asset purchase and a stock purchase?

Accepted Answer

In an asset purchase, the buyer acquires specific assets and assumes designated liabilities, leaving the seller with the corporate entity and remaining obligations. In a stock purchase, the buyer acquires the company's ownership interests, inheriting all assets and liabilities by operation of law. Asset purchases provide buyers with greater control over which liabilities they assume and allow stepped-up tax basis in acquired assets. Stock purchases offer simplicity and automatic transfer of contracts, licenses, and permits. California's repealed bulk sales law (effective 2024) eliminated most creditor notice requirements for asset sales, though successor liability doctrines may still apply. Our attorneys analyze each transaction to recommend optimal structure.

Question 3

How long does an M&A transaction typically take?

Accepted Answer

M&A transaction timelines vary significantly based on deal complexity, regulatory requirements, and negotiation dynamics. Simple small business asset sales may close within 30-60 days. Middle-market transactions typically require 90-180 days from letter of intent through closing. Large or complex transactions involving regulatory approvals, extensive due diligence, or complicated financing may extend to 6-12 months or longer. Key timeline factors include due diligence scope, purchase agreement negotiation, HSR Act waiting periods (30 days minimum if required), third-party consent requirements, and financing contingencies. Our California M&A attorneys work to maintain efficient timelines while ensuring thorough protection of client interests.

Question 4

What is due diligence and why is it important?

Accepted Answer

Due diligence is the comprehensive investigation of a target company's business, assets, liabilities, contracts, intellectual property, employees, regulatory compliance, and financial condition. For buyers, due diligence verifies seller representations, identifies undisclosed risks, validates valuation assumptions, and informs integration planning. Common due diligence workstreams include financial analysis, legal document review, tax compliance verification, intellectual property assessment, environmental investigation, and employment matters review. California-specific considerations include compliance with Labor Code requirements, environmental regulations under Health and Safety Code provisions, and securities law compliance. Thorough due diligence protects buyers from overpayment and hidden liabilities while enabling informed decision-making.

Question 5

What are representations and warranties in M&A?

Accepted Answer

Representations and warranties are statements of fact about the target business made by the seller in the purchase agreement. These statements cover corporate organization, capitalization, financial statements, material contracts, intellectual property, real property, environmental compliance, employee matters, tax compliance, litigation, and regulatory matters. Representations serve multiple purposes: providing factual basis for buyer's acquisition decision, allocating risk between parties through indemnification triggers, and creating disclosure obligations for known issues. Survival periods typically range from 12-24 months for general representations, with longer periods for fundamental representations and tax matters. Our attorneys negotiate appropriate scope, qualifications, and survival periods based on transaction dynamics and risk assessment.

Question 6

What is an earnout and when should it be used?

Accepted Answer

An earnout is a portion of purchase price contingent on the target business achieving specified performance metrics after closing. Earnouts bridge valuation gaps when buyers and sellers disagree on future performance expectations. Common earnout metrics include revenue targets, EBITDA thresholds, customer retention, or product development milestones. Earnout periods typically range from 1-3 years. While earnouts can facilitate deal completion, they frequently generate post-closing disputes regarding calculation methodologies, buyer operational decisions affecting performance, and accounting treatments. Our California M&A attorneys structure earnout provisions with clear metrics, objective measurement standards, dispute resolution mechanisms, and appropriate protections for both parties to minimize post-closing conflicts.

Question 7

What are the tax implications of selling my business?

Accepted Answer

Tax implications depend on transaction structure, entity type, and specific circumstances. Stock sales of C corporations generally produce capital gains treatment for sellers. S corporation stock sales pass through to shareholders with potential capital gains treatment. Asset sales may trigger ordinary income on depreciation recapture under IRC Section 1245 and inventory sales, with remaining proceeds potentially qualifying for capital gains. California generally conforms to federal treatment under Revenue and Taxation Code Section 17024, imposing up to 13.3% state tax on gains. Tax planning strategies include Qualified Small Business Stock exclusions under IRC Section 1202, installment sales under IRC Section 453, opportunity zone deferrals, and charitable giving strategies. Our attorneys coordinate with tax advisors to optimize after-tax transaction proceeds.

Question 8

Do I need an attorney to sell my business?

Accepted Answer

While not legally required, experienced M&A counsel is strongly recommended for business sales of any significant size. M&A transactions involve complex legal documents, significant liability exposure, tax implications, and negotiation dynamics that benefit from professional representation. Without counsel, sellers risk accepting unfavorable indemnification terms, inadequate liability protections, adverse tax treatment, and ambiguous contractual provisions generating post-closing disputes. The cost of M&A legal representation typically represents a small percentage of transaction value while delivering substantial benefits through improved deal terms, risk management, and efficient execution. Our California M&A attorneys provide value far exceeding fees through negotiated improvements and avoided pitfalls.

Question 9

What is the Hart-Scott-Rodino Act and when does it apply?

Accepted Answer

The Hart-Scott-Rodino Antitrust Improvements Act (15 U.S.C. § 18a) requires parties to file premerger notifications with the Federal Trade Commission and Department of Justice for transactions meeting specified size thresholds. As of 2025, transactions valued above $126 million generally trigger HSR filing requirements, subject to size-of-parties tests for transactions valued between $126 million and $504 million. Both parties must file and observe waiting periods (typically 30 days) before closing. Filing fees range from $30,000 to $800,000 based on transaction value. The agencies may issue Second Requests for additional information if competitive concerns arise, significantly extending review timelines. Our attorneys advise on HSR applicability, prepare required filings, and navigate the antitrust review process.

Question 10

How do I prepare my business for sale?

Accepted Answer

Sale preparation ideally begins 12-24 months before anticipated transaction timing. Key preparation activities include: organizing corporate records and resolving documentation gaps; obtaining audited or reviewed financial statements with consistent accounting policies; strengthening customer contracts and addressing unfavorable terms; resolving pending litigation and regulatory issues; documenting intellectual property ownership and assignments; addressing employment matters including independent contractor classification; preparing management presentation materials; and developing data room organization. Pre-sale legal due diligence identifies issues that could reduce valuation or derail transactions, enabling correction before buyer discovery. Our California M&A attorneys guide sellers through comprehensive preparation maximizing transaction value and minimizing execution risk.

Question 11

What happens to employees when a business is sold?

Accepted Answer

Employee treatment depends on transaction structure and buyer intentions. In stock purchases, employees generally continue employment with the acquired company, with employment terms governed by existing agreements. In asset purchases, the buyer typically extends offers to desired employees as new hires, though California's prohibition on non-compete agreements under Business and Professions Code Section 16600 limits post-sale employment restrictions. California WARN Act (Labor Code Sections 1400-1408) requires 60 days notice for facility closures or mass layoffs affecting 50+ employees. Benefits continuation, 401(k) plan treatment, and paid time off accrual require careful planning. Our attorneys address employment matters including retention agreements, severance arrangements, and integration planning to protect both parties' interests.

Question 12

What is working capital and how do adjustments work?

Accepted Answer

Working capital represents the target company's current assets minus current liabilities, reflecting the operating capital necessary to run the business. Purchase agreements typically establish target working capital levels based on historical averages. At closing, estimated working capital is compared to target, with purchase price adjusted accordingly. Post-closing true-up procedures calculate actual closing date working capital, with differences settled through additional payments or refunds. Working capital disputes frequently arise regarding measurement methodologies, permitted adjustments, inventory valuation, receivables collectibility, and accrual timing. Clear definitional language, detailed calculation examples, and effective dispute resolution provisions minimize post-closing conflicts. Our M&A attorneys draft working capital provisions protecting client interests through precise definitions and practical dispute mechanisms.

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