Types of Deal Structures

Types of Deal Structures

There are three typical types of deal structures.  Each has their benefits and drawbacks for both the seller and the buyer.  It is imperative you assess all options when structuring an acquisition, as some of the implications can be embedded and not readily visible, nor understood.  Early understanding of what works and is best for the seller and buyer is important to assist in guiding the terms of the relationship from the start.

Asset Acquisition
Asset acquisitions are a well-known and more traditional way of structuring an M&A deal. In this structure, a buyer purchases certain assets of a target company, typically with cash. Often an asset acquisition is conducted if the prospective buyer wants to purchase particular assets while not taking on any of the associated liabilities of the seller, which stay with the business entity. Asset acquisitions do tend to produce high tax costs for both the buyer and seller and the transaction can be an extremely time-intensive process. This process is also not ideal for buyers who are looking to acquire non-transferable assets like licenses and patents.

Stock Purchase
In a stock purchase acquisition, the buyer acquires all or a majority of a seller’s stock from its stockholders. Unlike an asset acquisition, all of the target company’s assets and liabilities are transferred to the buyer. The buyer will now own all contracts, intellectual property and licenses. The structures typically allow for more flexibility in the deal structure, benefiting both side, and taxation events are typically significantly lower for stock purchases.  One main disadvantage of stock purchase agreements to consider is that all financial or legal liabilities of the selling company will be transferred to the acquirer, thus extensive reps and warrants are often mandated by the buyer. Dissenting shareholders may also be an issue during this process, as most buyers want full buy-in from all shareholders.

Equity Purchase through Restructure.  One very common practice by financial institutions is the acquisition through the establishment of a new entity (newco) of which the newco has new ownership (private equity group & the sellers (if a minority stake is retained)), where the selling entity receives cash as well as rollover equity in the newco.  This is a common structure which facilitates the transaction and structured in a fashion to allow the existing selling entity to continue operating in essentially the same fashion as it has been.  The result of the transaction is the buyer having majority control and the seller having a minority stake. The seller is typically given cash, stock or both in exchange for all assets, licenses and intellectual property. In structuring the deal, the seller’s company is reconstituted or an entirely new entity is created.  This often is a very tax friendly method, and appeals to financial buyers. Comparatively, these are generally a simple deal process.

Exerpts Kison Patel of from DealRoom