One of the fastest ways to close an acquisition is to structure the right deal. A deal structure is a binding agreement that outlines the rights and obligations of both the seller and the buyer. It states what each party of the merger and acquisition is entitled to and what they are obligated to do under the agreement.
To create a great deal structure with a positive outcome for both parties, it’s best to devise a win-win strategy where the interests of both parties are well-represented in the deal and the risks are reduced to the barest minimum. Most often, such deal structures are more likely to lead to a sealed deal and may reduce the time required to complete the process.
There are generally five approaches for structuring a merger and acquisition deal.
An asset purchase does not deal with the target company’s shareholders. Instead, the acquiring company chooses only assets they find valuable and assumes liabilities that are specifically indicated in the purchase agreement.
The target company remains in operation and does not have to merge or liquidate.
This structure is often used when the buyer wishes to acquire a single division or business unit within a company. However, it can be time-intensive and complex due to the extra effort involved in identifying and transferring only the specified assets.
A stock purchase is the most straightforward deal.
In a stock purchase, the acquiring company purchases the target company’s stock from its shareholders. Rather than merging companies and dealing with complex contract reassignments, the target company gets to retain its name and business contracts but under new ownership.
In this case, the buyer must negotiate representations and warranties concerning the business’s assets and liabilities to ensure a complete and accurate understanding of the target company.
A direct merger is a common merger in which the acquiring company acquires all of the target company’s assets and liabilities. In other words, a merger is the combination of two companies into a single legal entity.
The target company then operates under the surviving company’s name and is considered liquidated. All shareholders of the target company are either compensated for their shares or hold shares in the surviving company.
A key advantage of a merger is that it generally requires the consent of only a majority of the target company’s shareholders. It could be a good choice when the target company has multiple shareholders.
Forward Triangular Merger
In a forward triangular merger also known as an indirect merger, the target company merges into a subsidiary of the acquiring company. This M&A deal structure generally occurs when the merger combines both cash and stock.
The acquiring company is protected from the target company’s liabilities since it’s merging into a subsidiary rather than directly into the acquiring company.
Regarding shareholders, the acquisition subsidiary compensates the target’s shareholders with stock, but up to 50% of their compensation can be in the form of cash or other non-stock options.
Reverse Triangular Merger
The common reverse triangular merger similar to a forward triangular merger also shelters the acquiring company from the target’s liabilities because it is not a direct merger.
The acquisition subsidiary in this scenario is not the surviving company. Instead, it purchases the target company and merges into the target company as a wholly owned subsidiary of the acquiring company. The buyer’s stock or cash is issued to the target company’s shareholders.
It is the most popular form of M&A deal structure because the surviving target company is preserved, so it keeps its business contracts and does not have to transfer its assets to the acquiring company, which may not be possible otherwise with anti-assignment clauses.
This allows the acquiring company to have access and control of the target’s business contracts while the target’s business continues as usual.
Which deal structure is best for you?
Each deal structure comes with its tax advantages or disadvantages due to continuity implications and legal requirements. All factors should be considered when choosing the best deal structure for your business.
Due to the challenging nature of acquisition structure negotiations, it is crucial to work with proficient M&A advisors. Here at Epoch Equity, we make it our mission to help founders exit their businesses or acquire new ones by simplifying the complicated process into a few effortless steps.