10 Nov M&A Basics: Structuring a Deal
When selling a business there are many aspects that need to be considered including how much you are willing to sell the business for, what type of buyer you would like to see make the acquisition, how long you will stay with the business after the deal is closed, and how the deal will be structured. The later is the point I will discuss.
There are many different ways to structure an M&A deal starting with an asset acquisition where the acquiring company simply buys out all of the assets of the seller as well as stock purchases, which simply sells the ownership of the company rather than the assets of the company. While both have their advantages and disadvantages, Stock purchase agreements are useful because the seller is able to benefit from the tax advantages of a stock purchase which involve paying a capital gains tax at a lower rate. These lower tax rates allowed both the buyer and the seller to benefit by negotiating a price that worked to the advantage of both parties. However, where the Bush tax cuts may be eliminated in the near future, these advantages may be done away.
One disadvantage of a stock purchase is that since the stocks are purchased and held under the same entity, as opposed to the asset purchase that would acquire the assets and hold them under a new or separate entity, the purchasing company also acquires all liabilities that may or may not be know to all parties involved. An asset purchase would not include the liabilities that are held with the selling company’s name.
It is important to note that an S Corp has some tax advantages when going through a stock purchase. If your business is not currently set up as a S Corp it may be worth considering a restructuring of the entity to capitalize during the sell of your business.
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