Start. Grow. Exit

Deal structure matters

OLYMPUS DIGITAL CAMERAA buyer is acquiring either certain assets of your company (in an asset deal) or your company’s stock (in a stock/share deal).

Buyers often prefer asset deals over stock deals, because they pick and choose what they want to buy (good assets) and leave behind what they do not want to buy. In some cases, an asset deal might even help to shield a buyer from the past misdeeds of the seller, but that’s not always the case. However, asset sales may also present problems for buyers. Certain assets are more difficult to transfer due to issues of assignability, legal ownership, and third-party consents. Obtaining consents and refiling permit applications can slow down the whole transaction process.

You, as seller, typically prefer stock deals. In a stock deal, the owners of the company’s stock sell those shares to the buyer and this involves only one taxation. An asset deal often involves double taxation. The corporation is first taxed upon selling the assets to the buyer. The corporation’s owners are then taxed again when the proceeds transfer outside the corporation. In my home country, Austria, this means, typically, an additional 25% taxes! In addition to the double taxation, you still have your old company and have the effort required on your side to run the company and to close it after the asset transaction is finished. If you agree to an earn-out clause, this might mean that you have to continue with your company for several years, which costs you money and effort.

The decision to structure an acquisition as either an asset deal or a stock deal is an important one and should be determined on a case-by-case basis. The interests of the buyer and the seller often directly compete and effective negotiation is required to balance these interests. A higher evaluation in an asset deal compared to a stock deal might still mean less money for you as the owner of the business after taxation.

If the buyer does not offer you an all-cash deal, then this adds another layer of complexity to the deal. In an all-cash deal, the buyer uses cash to buy your company. A publicly traded company may decide to acquire your company using its own equity and not cash. In a cash deal, the roles of the two parties are clear-cut, and the exchange of money for shares or assets completes a simple transfer of ownership. But in an exchange of shares, you have to do a valuation of the buyer’s shares and it becomes far less clear who is the buyer and who is the seller. In some cases, you and the shareholders of your company can end up owning a large chunk of shares of the company that bought your shares. In many situations, of course, the buyer will be so much larger than you that you will end up owning only a negligible proportion of the combined company. But also, keep in mind that in such a case the entire risk that the expected synergy value embedded in the acquisition premium will not materialise is shared with you and the selling shareholders as you are now a shareholder of the joint company. Therefore, the choice between cash and stock should never be made without full and careful consideration of the potential consequences.

Lastly, if you foresee that you are on the right track and it is likely that you want to sell the company in the next few years, you should talk to an experienced CPA/advisor early enough to figure out what’s the best option to own shares in your company in case of an exit. If the valuation of your company is already high and/or you have an acquisition offer on the table it might be too late for such considerations. Years before that, if the valuation of the company is still low, it might be beneficial in some countries to transfer your shares to a private trust or structure that otherwise to have the optimum result in terms of taxation in case of an exit.

To summarise: Involve your advisor/tax lawyer to figure out which structure means what in terms of cash that you and your shareholders really receive at the end of the day before accepting any term-sheet from a potential buyer.

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