In simple terms, M&A deal structure is the method that is used to acquire another business. It is one of the key follow-up questions how much is this business worth? In this article, we explain as simply as possible the basic structures you may encounter when buying a business.
What is an M&A Deal Structure?
An M&A deal structure is pretty much exactly as it sounds. It’s a binding agreement between two companies (the parties involved in the M&A process) that spells out all the particulars of the deal. Namely the rights and obligations of all parties involved. It takes into consideration all aspects of the deal and the role of the company’s management (on both sides of the table) that need to be accomplished for the deal to be finalized. In short, the deal structure is a document of the terms and conditions of the transaction.
Executing an alternative M&A strategy
Realizing value from alternative M&A strategies may not be easy. Being successful across a diverse set of deals can require acquirers to commit to innovation, holistic value creation, and robust infrastructure. Top-performing acquirers pursuing alternative strategies generally employ the following six operational levers to execute alternative strategies effectively.
Reshape portfolio frequently around core assets.
Establish a robust corporate development function.
Adopt a holistic value-driven lens.
Prepare playbooks for all types of deal structures.
Determine the right premium during diligence.
Prioritize business model integration.
Asset Acquisition Deal Structure
Asset acquisition is simple: the buyer agrees to buy from the seller the individual assets of the business. The “assets” the buyer may wish to buy can be anything from machinery, equipment, inventory, real estate property, contract rights, accounts receivables, intellectual property, a database of customers, and so on.
The buyer may also agree to take up certain specific liabilities of the business being sold. Liabilities can be anything from bank loans, debt that the seller took out to finance the purchase of certain assets, accounts payable, contract obligations, employment contracts, and so on.
An asset acquisition sounds simple enough, right? As a concept, yes – very simple! In practical reality? Not always that simple.
With this type of sale, the parties will have to specifically identify. What assets the buyer intends to buy, and what liabilities the buyer intends to take up? This might end up being a mammoth task for both parties to identify and agree on what specifically will be transferred and what will not. For some buyers, there may be worries if certain assets are not transferred. This will hamper or delay the ability of the buyer to continue the operations of the business once the sale is completed.
There may also be the headache of satisfying the process of transferring assets. Some assets may require registration or recording to “properly” transfer those assets. Other assets might have debt tied to the asset (because the debt was used to finance the purchase of such assets). This may create third-party rights and may require the parties to seek the permission of a third party before the asset can be transferred.
Stock Purchase Deal Structure
A stock acquisition does exactly what it says on the tin. The buyer agrees to buy the target company’s stock from the stockholders. It is often the easiest type of transaction to execute for small business transactions.
From a legal perspective, very little about the company changes except who now owns the company. This can be an advantage because virtually all the assets and contracts are under the name of the company so there is likely to be less consent from third parties needed to approve the transaction. It is therefore easier for the buyer to continue the operations of the business after the sale is consummated.
The ease of continuing the operations of the business after the sale also has a downside for the buyer. The buyer may have to be responsible for any unforeseen or undisclosed liabilities that were not disclosed or anticipated during the transaction process.
Things may also get a little bit more complicated if the target company has many stockholders. Not only is there an administrative burden of dealing with large numbers of shareholders. But things can also get complicated if there are different share classes as each class may feel discontentment in terms of the sale compared to other share classes.
The problem is exacerbated as the number of shareholders grows. The more shareholders there are, the more likely there will be shareholders who will not agree to the sale.
For most small to medium business transactions. This is likely not too much of a problem as most small to medium businesses are closely held companies with a smaller number of shareholders.
A merger is when two companies combine into one company. Every state will have legislation and case law to govern how the merger process will work. When two companies combine, one of these companies will “survive” the merger and continue to exist, while the other company will cease to exist. The surviving company will often be called the “surviving corporation,” while the other company will be referred to as the “disappearing corporation” or the “merged corporation.”
When two businesses agree to merge, a document is usually drafted called the “merger agreement” or “plan of merger.” This plan will tell the shareholders of each company what they will receive after the merger. Of course, the shareholders of the disappearing corporation must exchange their stock for something else such as cash or shares in the surviving corporation because their company will no longer exist after the merger.
Once the merger is consummated, the surviving corporation will assume all the assets and liabilities of the disappearing corporation. In addition, the state law where the surviving corporation was incorporated will continue to govern the company after it merges. That said if the two merging companies are incorporated in different states. Each company must follow its state law requirements before it can merge.
There are two basic merger structures: direct and indirect. In a direct merger, the target company and the buying company directly merge. In an indirect merger, the target company will merge with a subsidiary company of the buyer. If the subsidiary of the buyer survives, this is called a “forward triangular merger.” If the target company survives, this is called a “reverse triangular merger.”