The Transition Companies Mergers & Acquisitions
The Transition Companies Mergers & Acquisitions: Deal Structure
Structure Plays An Important Role for Sellers and Buyers
There is an old axiom that dictates that, while the seller determines the price of his or her company, the buyer sets the terms or “structure”. While sellers tend to prefer all cash for their companies, such a structure may not produce the highest overall value for the business and can limit the prospective buyer universe.
Depending on the specifics of the deal, a seller can use structure to:
· Defer taxes
· Participate in the future success of the business, and
· Maximize the purchase price from the sale of the company.
Buyers use structure as a way to:
· Manage cash flow
· Aid in the transition of an owner-dependent business
· Bridge the gap between buyer and seller value expectations, and
· Finance the transaction
Like price, deal structure is negotiable and can vary widely from one transaction to the next. The individual needs of sellers and buyers are considered in structuring each transaction in the most appealing manner to meet both parties’ objectives.
Deal “Type”… Not to be Confused with “Structure”
At the broadest level, deal type is the fundamental decision of whether the deal will be structured as a stock or an asset purchase.
Stock Purchase: In a stock purchase, the shares of the stock are transferred from seller to buyer and thereby the buyer assumes all assets, liabilities, contingent liabilities, and operations of the business, unless specifically excluded in the Stock Purchase Agreement.
Asset Purchase: Under this structure only the assets and liabilities specified in the Asset Purchase Agreement are transferred to the buyer, who must either create a new entity or use an existing entity to acquire the business.
Sellers generally prefer stock sales, which allow for an easier transition and usually entitle them to pay taxes on the sale at the lower capital gains rate. Buyers often prefer an asset purchase that identifies the exact assets acquired and liabilities assumed. This type of transaction creates a barrier of contingent liabilities flowing through from seller to buyer. In addition, an asset purchase may offer tax benefits to the buyer through a step-up in asset basis.
Sometimes deal structure is used in raising capital or growth capital.
April 09 2009 | The Transition Companies Mergers | Comments Off