The deal structure in an M&A transaction is the collection of terms and conditions that encompass the deal. Three traditional ways of structuring an M&A deal are through an asset purchase, a stock purchase, or a merger. The preferred deal structure is usually agreed to in the Letter of Intent. Once due diligence is complete, you will finalize the structure in a written document such as a Definitive Purchase Agreement.
The three main components of the deal consist of:
- Legal Structure – This includes the method: stock purchase, asset purchase, or a merger. It also defines what happens with each functional area once the deal is complete. Finally, it contains all of the negotiated representations and warranties.
- Financial Consideration – This not only specifies the price you are going to pay for the company but also earnouts and responsibilities for any tax implications.
- The rest of the Equation – All of the other issues that are important to the seller, such as continued employment, use of a company car (or similar perks), and involvement in the community. These are the items that you have negotiated to entice the prospect and complete the seller’s equation. The seller’s equation refers to the total package of benefits the seller wants to complete a deal, and usually goes beyond price.
Deal structure can be a contentious issue because it can affect items such as taxes and liabilities. Buyers often want asset purchases while sellers prefer stock purchases. Having a deep understanding of the implications of your chosen structure will help you understand the true value of the deal you are trying to negotiate.
Bonus Tip – Whether you are a buyer or seller, decide early which deal structure is most desirable and get the best tax & legal advice obtainable.
Reach out to us with questions on deal structure.