Addressing Deal Structure in the LOI

In last week’s webinar “Contemporary Legal Issues in M&A” I received the following question about choosing the correct deal structure.

Q: “What if you don’t know what kind of deal structure you want?”

There are three main deal structures: stock purchase, asset purchase and merger. Each has their own advantages and disadvantages. Typically sellers prefer a stock purchase and buyers prefer an asset purchase.  However, sometimes you don’t know which structure is most beneficial.

If you don’t know what deal structure you want, I suggest you put a placeholder in the letter of intent. For example, you may say something along the lines of, “The parties will agree on an asset or stock purchase. They will use their best efforts to determine the most appropriate or tax efficient method” or “We anticipate an asset purchase, but the parties will discuss when more information is obtained.”

If you don’t address deal structure in the LOI, the seller will automatically default to a stock purchase and the buyer to an asset purchase. You don’t want to unintentionally defer to the other party, allowing them to make the decision. By addressing deal structure in the LOI, you can align the expectations of both buyer and seller.

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