Deal Structuring in M&A Transactions

There are many factors to consider when moving through a deal. As an M&A attorney myself, I have worked with clients on deals of all sizes and scopes. In all cases, I have seen how a well-structured deal can maximize value and minimize risks. Whether you're looking to buy or sell, understanding your different structuring options and their implications is key to a successful outcome. 1. Choosing the Right Structure: Asset Purchase vs. Stock Purchase One of the first and most important steps in an M&A transaction is how to structure your deal whether that be an asset purchase or a stock purchase. Each approach has its advantages and drawbacks depending on your specific deal. An asset purchase structure allows for a more selective acquisition of specific assets. It tends to be the preferred method because of factors like flexibility and tax benefits. However, it can also be complex and be subject to a lot of regulatory requirements. In a stock purchase, the buyer acquires the entire company, including all assets and liabilities. This may be considered the simpler method, but buyers should be aware of the risk of inheriting undisclosed liabilities. Additionally, some deals incorporate elements of both asset and stock purchases to create a more customized solution that satisfies both parties. 2. Consideration Structure: Cash, Stock, or Earnouts? How a deal is financed can significantly impact risk for both parties. There are several key considerations to navigate. Cash deals provide immediate liquidity to sellers but require buyers to have substantial capital on hand. Equity rollover or providing equity as consideration for the deal allows sellers to participate more closely with the business, but it comes with valuation risk as well. Earnouts refer to when a portion of the purchase price relates to future performance which reduces upfront risk for buyers while allowing sellers to benefit from future growth. On the other hand, earnouts can lead to post-closing disputes if performance metrics aren't clearly defined. 3. Tax Considerations Tax implications play a key role in structuring an M&A deal. Both buyers and sellers should work closely with tax advisors to optimize the transaction for both parties. For starters, sellers typically prefer structures that qualify for capital gains rather than ordinary income taxation because of its benefits. Finally, in an asset purchase, buyers often receive a step-up in the tax basis of acquired assets, leading to potentially significant savings. However, this is highly dependent on the tax characteristics of the target company. 4. Seller Financing and Retained Equity Sellers sometimes may agree to provide financing for the deal, either through a seller note or a retained equity stake. Though this can help bridge valuation gaps and close the deal more effectively, it also requires a lot of trust between both parties. Seller notes refer to when a portion of the purchase price is paid over time, which allows buyers to reduce upfront cash payments. As for equity rollovers, sellers retain a stake in the business after closing, often aligning incentives for long-term success. However, this has been impacted by recent SBA guidelines. To conclude, M&A structuring is not a one-size-fits-all approach. It requires careful negotiation, decisions, planning, and a deep understanding of financial and legal implications. Whatever side you're on, having the right structure is important to minimize your risks and maximize value. If you'd like to learn more, listen to the Dealmaking with Laura DiFrancesco podcast or schedule a consultation call with us, visit deanstreetlaw.com/links Have you encountered challenges in structuring M&A deals? I'd love to hear your thoughts and experiences. Drop a comment below or reach out directly- let's discuss how to get the best structure for you.