Structuring a company acquisition transaction involves careful consideration of numerous factors. Key elements to consider include assumption of liability, transferability of intellectual property rights, the number of a target’s shareholders, required approvals, tax consequences, financing, and third-party consents. Industry-specific regulations can further complicate the process. For instance, the transfer of liquor licenses or ownership of professional businesses may be subject to unique restrictions. To ensure a successful transaction, it is always advisable to consult with legal counsel to determine a suitable deal structure.
Factors to discuss before acquiring another company include the following:
Potential Acquisition of Liabilities: Thoroughly assess the target company’s liabilities to avoid unexpected financial burdens.
- If the buyer is cautious about acquiring certain liabilities, an asset purchase transaction can be more favorable. This type of transaction enables buyers to select the specific assets they wish to acquire and avoid potential unknown or undisclosed liabilities resulting from past non-compliance.
Intellectual Property and Licenses: Identify and evaluate the necessary intellectual property and licenses required for smooth business operations.
- If licenses or intellectual property rights are important to the buyer in operating the business they intend to acquire, then a stock purchase transaction may be more desirable. Stock acquisition results in the buyer’s acquisition of all liabilities and assets, including licenses. However, the buyer should meticulously examine the transferability of the licenses. For instance, liquor licenses are typically not transferable. Additionally, buyers should be cautious about ownership requirements in specific industries. For example, a state may require that architecture businesses be owned by a certain percentage of licensed architects. Incorporated medical and medical spa offices are often required to be owned by licensed physicians, nurse practitioners, or other licensed healthcare professionals. In some states, changes in ownership for engineering companies must be reported to the respective professional boards.
Number of Shareholders & Stockholder Approvals: Determine the number of owners in the company to be acquired.
- If there are too many shareholders in the target company, bringing them all to an agreement to sell their shares may be challenging unless the target’s shareholder agreement or operating agreement includes drag-along rights. In this case, the buyer may consider structuring the deal as a merger. To complete the merger transaction, the buyer must obtain consent from the target’s majority shareholder. Meanwhile, minority shareholders may be required to sell their shares and/or exercise their appraisal rights.
- Target stockholder approval is usually required. In some cases, the buyer’s stockholder approval must also be obtained.
Tax Considerations: Consult your tax advisor about the tax consequences of the deal.
- If the deal is structured as an asset purchase transaction, the buyer may deduct the purchase price from the buyer’s taxes. However, this may be unattractive to the target from a tax perspective.
Financing and Financial Capacity: Determine the most suitable financing options and ensure the buyer has the financial capacity to complete the transaction.
- A seller will usually want to see proof that the buyer possesses sufficient funds to pay the purchase price. Therefore, the seller may request a security interest in the target’s stock and personal guarantees from the buyer’s owner. A security interest should be perfected by filing, so that the seller’s interest is protected against the buyer’s other creditors. Sometimes, buyers may choose to issue securities to raise capital to finance the deal. In third-party financed transactions, commitment letters from a bank also serve as proof of the buyer’s financial capability.
- In addition to the ability to finance the transaction, a seller should pay attention to the buyer’s solvency. An entity is generally considered insolvent if the entity’s debts are greater than the entity’s assets. 11 U.S.C. §101(32). If the buyer is insolvent on the transaction date or becomes insolvent as a result of the transaction, the transaction may be considered fraudulent under 11 U.S.C. § 548.
Third-Party Consents: Identify and obtain any required third-party consents, such as from landlords, suppliers, or customers.
- Transaction execution may trigger change-of-control restrictions on the assignment of certain material contracts that are crucial to the business. The contracts must be analyzed carefully to determine if third-party consents are required.
The above points merely scratch the surface of the complexities involved in structuring a transaction. Industry nuances, appetite for assumption of liability, the immigration status of key employees, required licenses, the target’s shareholder count — all these, and more, significantly influence the determination of a deal structure, be it a merger, asset purchase, or stock acquisition. Engaging legal and tax professionals is foundational to crafting a deal that aligns with one’s business objectives, mitigates potential risks, and ensures a well-informed path forward.