White Paper | M&A in Online Specialty Retail
The McLean Group | Jones Day
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Mergers & Acquisitions in Online Specialty Retail
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Corporate housekeeping – Seller should ensure that its corporate books and records (including
board and stockholder minutes, stock ledgers, stock certificates and commercial agreements) are
in order. Locate equity purchase agreements and any shareholder governance agreements.
Confirm state annual reports have been filed and that the seller is in good standing where
required to be qualified. Seller and its counsel should consider whether conversion from an LLC
to a corporation or reincorporation in a different jurisdiction may be beneficial.
Equity Incentives – Seller should ensure that all intended equity grants have been appropriately
documented and any stock options, stock or other equity awards have been properly approved
and executed – it is important that this be done well in advance of commencing a sale process.
Intellectual Property – Seller should work with legal counsel to ensure that its intellectual
property is adequately protected and consider whether to file patent and trademark registrations
for material proprietary intellectual property. Acquirers frequently look at patent and trademark
registrations as high value assets which could contribute to an increased purchase price that
would more than offset the expense of registration. Intellectual property can be a critical asset to
an online retailer and is frequently either overlooked or inadequately maintained. Seller should
ensure that all relevant employees have entered into invention assignment agreements
transferring all IP to the seller and requiring confidentiality.
Accounting/Finance – Seller should consider obtaining audited financial statements for its past
two fiscal years or at least having its financial statements reviewed by a reputable accounting
firm.
Litigation and other known liabilities – Seller should consider whether to expedite settlement of
any material litigation or otherwise address known liabilities which could present an impediment
to a sale. Seller should be prepared to discuss the impact of a negative outcome of any pending
litigation on seller’s business and prospects.
Third party and governmental consents – Seller and its legal counsel should review material
contracts and applicable law and determine whether consents may be required and how best to
address. During this review, it may also be beneficial to determine whether any contracts due for
renewal should be extended if valuable to the company, or allowed to expire if no longer
favorable.
Liens – Seller should run a lien search to determine whether any invalid liens exist and whether
there are any unknown debts which would need to be satisfied prior to a sale.
Additionally, seller and its significant stockholders should work with experienced legal counsel to determine
which transaction structure may be most advantageous for tax-planning and other purposes. It may be desirable
to effect a tax-free transaction or a taxable transaction. Even within the realm of taxable transactions, there are
frequently non-obvious provisions in the tax code that would make certain structures unfavorable from a tax
perspective. Conversely, there may be incentives in the tax code – such as the ownership of Qualified Small
Business Stock – which stockholders may qualify for, which can reduce or even eliminate federal and/or state
income taxes, depending on the circumstances.
