How to Pick the Right Deal Structure and Purchase Agreement Terms for M&A

Mergers and acquisitions are among the most complicated endeavors your business may be involved in. There are many reasons for this, including that you must determine the right deal structure and purchase agreement terms. The right structure and terms for your company will depend on your goals, how your company is structured, and how you want to manage what happens next. Unfortunately, the answers aren’t usually straightforward, and as such, it can be immensely helpful to have a well-versed M&A attorney on your side.

What is an M&A Deal Structure?

An M&A deal structure is a legal agreement between the parties to a merger or acquisition (M&A) that details the rights and responsibilities of all involved parties. Such an agreement states what each party of the merger or acquisition is entitled to receive and what each must do according to the mutual agreement. A deal structure can be referred to as the terms and conditions of an M&A. One company can buy another company’s stock or its assets. If one party purchases a company’s assets, they individually buy each of those assets. They don’t need to itemize every paperclip, but they do need a comprehensive agreement and inventory.

However, it’s essential to note that there is no stock if the company selling is an LLC. Rather, the company would sell membership interests or, for partnerships, its partnership interests.

Traditional Ways of Structuring an M&A Deal

There are three traditional and widely used methods to structure an M&A deal. However, these methods can also be mingled to achieve a more flexible deal structure. Additionally, there are also more creative and flexible deal structuring methods if you desire more than what these have to offer. When structuring a deal, the parties involved should consider its advantages and disadvantages.

Asset Acquisition

With this model, the buyer purchases the assets of the other company. Asset acquisition is generally the best deal structure for the selling company if it desires a cash transaction. The buyer gets to select which assets it wants to purchase. Acquisitions are common for main street and lower middle-market companies, whereas mergers are not.

Advantages of asset acquisition might include:

The buyer can decline some assets if it chooses.
After the sale, the selling company continues to operate as a corporate entity, keeping its remaining unsold assets and liabilities.

Disadvantages might include:

The purchasing party might not be legally allowed to acquire non-transferable assets, such as goodwill.
An asset acquisition might result in high tax costs for both parties to the transaction.
Increased time to finalize the deal when compared to other kinds of structures.

Stock Purchase

With a stock purchase, assets aren’t directly transacted as they are in acquisition. With this structure, most of the seller’s voting stock shares are bought in the transaction. Essentially, the buyer has control of the seller’s assets, and their liabilities are also transferred to the buyer.

Potential advantages of a stock acquisition include:

Taxes on a stock purchase deal are reduced, especially for selling parties.
Negotiations are less complicated, closing a stock purchase deal is less time-consuming
The deal may be less expensive for both the buyer and seller.

Potential disadvantages of a stock purchase acquisition:

Legal or financial liabilities.
Uncooperative minority shareholders might raise issues.

Merger

“Merger” is often used interchangeably with “acquisition.” However, a traditional merger arises from an agreement between two separate business entities to combine into one new entity. Mergers are usually less complicated than acquisitions considering that all liabilities and assets become that of the new entity. So, there’s no picking and choosing who will keep what.

Confused about M&A? Hackstaff Snow Atkinson & Griess Can Help

When it comes to mergers and acquisitions, it’s easy to make mistakes that don’t provide you with the assets you thought you were getting. The good news is that you can avoid this problem by hiring an experienced business lawyer from Hackstaff Snow Atkinson & Griess to help. We will ensure that you understand all your options and what you are getting into. When you share your business goals with us, we work hard to help you meet them in the best ways possible. Call our office today to learn more about the M&A services we offer.