Deal Structures in M&A (2024)

Businesses use M&A to accomplish a variety of strategic goals, including growing into new markets, generating economies of scale, gaining access to cutting-edge technologies, or diversifying their business. The deal structure, which establishes the terms and circ*mstances of the transaction, is one of the main components of M&A. This page defines the deal structure, discusses why deal structure is important, and lists the various types of deal structures.

What is Deal Structure?

In M&A, deal structure refers to the terms and conditions of the transaction, including how the purchase price will be paid, the legal and regulatory requirements, and the allocation of risks and rewards between the buyer and the seller.

The deal structure also determines the form of consideration, such as the assets or securities that will be exchanged between the parties. The deal structure can be complex, involving various legal, financial, and accounting considerations.

What are the Different Types of Deal Structures?

There are several types of deal structures used in M&A, and each has its advantages and disadvantages. Here are the most common types of deal structures:

Stock Purchase

A stock purchase is a type of deal where the buyer obtains all or a controlling interest in the target company's stock. In this sort of deal arrangement, the buyer obtains ownership of the entire business, along with all of its assets, liabilities, and responsibilities. Often, stock acquisitions are set up as cash transactions or a mix of cash and shares.

Advantages:

• Simplified legal and regulatory requirements
• Easy to implement
• The buyer acquires all the assets and liabilities of the target company

Disadvantages:

• The buyer may assume unknown liabilities and risks
• The seller may face tax liabilities

Asset Purchase

An asset purchase is a type of deal structure where the buyer purchases specific assets or business units of the target company. In this deal structure, the buyer only acquires the assets necessary to operate the business, such as intellectual property, equipment, and real estate. The seller retains ownership of the remaining assets, including liabilities and obligations.

Advantages:

• The buyer can acquire specific assets without assuming unknown liabilities and risks
• The seller can retain ownership of unwanted assets

Disadvantages:

• The buyer may face legal and regulatory requirements to transfer assets
• The seller may face tax liabilities

Merger

A merger is a type of deal structure where two or more companies combine to form a new entity. In this type of deal structure, the companies merge their assets, liabilities, and operations to create a new legal entity. The merger can be structured as a stock-for-stock exchange, a cash-for-stock exchange, or a combination of both.

Advantages:

• Creates a new entity with enhanced strategic and financial capabilities
• This can result in cost savings and synergies

Disadvantages:

• Complex legal and regulatory requirements
• The merger can be costly and time-consuming

Leveraged Buyout (LBO):

A leveraged buyout is when the buyer uses a significant amount of debt to finance the purchase of the target company. In this type of deal structure, the buyer borrows money to pay for the purchase price, and the debt is repaid using the target company's cash flow. The buyer typically uses the target company's assets as collateral for the debt.

Advantages:

• LBOs can allow buyers to acquire companies they may not have been able to afford with equity alone
• The target company's cash flow is used to repay the debt, allowing the buyer to potentially generate a high return on their investment

Disadvantages:

• LBOs can be risky, as the high level of debt can make the target company vulnerable to economic downturns
• This can result in a significant financial burden for the target company and its employees

Joint Venture:

A joint venture is when two or more companies collaborate to form a new business entity. In this type of deal structure, the parties contribute assets or resources to the joint venture, which is operated as a separate business entity. Joint ventures can be structured as partnerships or limited liability companies.

Advantages:

• Allows companies to combine resources and expertise to achieve a common objective
• This can result in cost savings and synergies

Disadvantages:

• Requires careful planning and coordination between the parties
• This can result in disputes over management and control of the joint venture

Types of Payment Methods in M&A:

Cash Payment: This is the most straightforward payment method in M&A, where the buyer pays the purchase price in cash to the seller.

Stock Payment: In this payment method, the buyer pays the seller with the stock of the buyer's company. This payment method is popular when the buyer's stock is highly valued.

Debt Payment: In this payment method, the buyer takes on debt to finance the purchase price. The debt is repaid over time using the target company's cash flow.

Earnouts: This payment method is used when the purchase price is contingent on the target company achieving certain performance milestones, such as revenue or profit targets.

Seller Financing: In this payment method, the seller provides financing to the buyer in the form of a loan or a promissory note. The buyer repays the loan over time using the target company's cash flow.

Equity Payment: In this payment method, the buyer pays the seller with equity in the target company. This payment method is popular when the buyer wants to retain the seller's expertise and involvement in the target company.

Combination Payment: In this payment method, the buyer combines two or more payment methods, such as cash and stock, to pay the purchase price. The combination payment method balances the risks and rewards between the buyer and the seller.

Why is Deal Structure Important to Understand?

Understanding the deal structure is crucial, especially for buyers, because it impacts the entire deal. Carlos Cesta, Vice President of Corp Dev at Presidio, refers to deal structure as a key comment of the .

For instance, paying upfront will increase risks but you will be able to integrate the acquired business immediately. If there is an earnout, the initial payment will be smaller, and risks will be lower, but integration must be delayed. If the seller is vital to the acquired business and buyers want to keep them involved, they can use equity payment, (and this is why the integration lead must be involved early in the process).

Also, understanding the deal structure helps buyers evaluate the potential risks and rewards of the transaction, including the financing options and the tax implications. Sellers must also understand the deal structure to negotiate the purchase price effectively and minimize the risks associated with the transaction. In addition, understanding the deal structure helps both parties to manage their expectations and plan for the future after the transaction.

Conclusion

In conclusion, understanding the deal structure is essential for buyers and sellers in M&A. Deal structure determines the terms and conditions of the transaction, including how the purchase price will be paid, the legal and regulatory requirements, and the allocation of risks and rewards between the buyer and the seller. There are several types of deal structures, including stock purchases, asset purchases, mergers, leveraged buyouts, and joint ventures. Each type of deal structure has its advantages and disadvantages, and the choice of the structure depends on the specific circ*mstances of the transaction. For more tips and best practices, visit our website mascience.com.

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