Transaction Structuring: A Roundup of the Three Most Common Structures

Transaction Structuring

When contemplating any kind of merger or acquisition, it is important to consider what type of transaction you will move forward with.  In order for a deal to be considered successful, it must be mutually beneficial for both the Buyer and the Seller.

In today’s market, there are three common structures used in the sale of these sale businesses – asset purchases, stock purchases, and mergers.

1. Asset Purchase

An Asset Purchase is a structure in which a Buyer purchases assets of a business from a Seller. This deal is structured around an Asset Purchase Agreement, and consists of the Buyer and Seller agreeing upon what each party will gain.

This type of structure is a preferred method, as the Buyer does not have to assume all liability from the Seller. Rather, the Buyer has the ability to choose what aspects of the company it wants.

Some of the disadvantages to this structure are in the amount of contracts and agreements. Because both parties will end up with an aspect of the whole, there are a number of supplemental agreements that must be executed in order to transfer to the customer and/or vendor contracts.

2. Stock Purchase

A Stock Purchase is a structure in which a Buyer purchases all of the equity in a company. In this type of transaction, once the deal is complete the Seller is no longer involved in the company. Although the name of the company, the employees, and basic business principles remain the same, the ownership is in different hands.

This type of structure has both advantages and disadvantages to the Buyer and Seller. This type of structure is often praised for how quickly and easily it can be completed. By having the Buyer purchase the Stock it avoids having to transfer titles and contracts and keeps a third party consent out of the deal.

Although this structure has its advantages, there are drawbacks for the Buyer. In this type of structure the Buyer is assuming all liabilities from the Seller, both current and past liabilities since the formation of the entity. The Buyer is also not able to negotiate specific assets of the business it does not want nor does it gain the ability to begin with a new depreciation schedule.

3. Merger

The last type of transaction structure is a merger. A merger is when two companies combine to form one entity. This deal structure works when one company agrees to buy another companies shares or assets and then the two combine to form a “new” company.

This merger is often regarded as the smoothest for both the Buyer and Seller. All contracts and liabilities are passed to the new entity without much negotiation.

The disadvantages to a Merger, however, are that both companies can put the sale at risk depending upon shareholder disapproval. In some instances, the shareholders for a large enough block and vote against the merger.

Selecting the best transaction structure for and effective Merger and Acquisition transaction is critical to a company’s success. When choosing between an Asset Purchase, Stock Purchase or Merger, both parties must consider the legal, tax, and business factors will be advantageous to achieving their goals.

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