How to Structure Your Business Acquisition: An Insider’s Guide

What Does “Buying a Business” Mean?

Acquisition structure describes how your deal is organized, and how the company will operate post-sale. 

Financially, how will you compensate the seller and acquire the business? And after you buy it, how will it be run? Your acquisition structure provides the answers to these questions.

3 Main M&A Transaction Types

There are three main types of business acquisition deal structures that are commonly used today. Let’s take a look at each one in depth:

Stock Purchase Agreement

If the company you’re buying has issued shares of stock, you can acquire the business by purchasing all or a majority of the stock shares. With private companies, these shares may be difficult to value. 

But a stock-purchase agreement can pave the way for a smooth transition. Often, current leadership may remain in place operating the business. 

Note that in a stock purchase acquisition deal, the buyer acquires all the outstanding liabilities of the business. Do careful due diligence to make sure you understand all the debts and other obligations that come with this acquisition.

Also, if you retain minority shareholders in the stock-purchase deal, they may have their own opinions on how things should be run. 

Asset Purchase

Many businesses diversify what they do over time, and end up with a variety of different income-generating activities. In an asset purchase, the buyer acquires only a specific set of assets. 

The seller’s business may continue on, but without the assets they sold to you. For instance, as I write this, Bed Bath & Beyond was contemplating selling off its baby-gear focused Buybuy Baby division. Its main BB&B retail empire isn’t on the block, just that division.

An asset purchase deal allows you to pick and choose exactly what you’re buying, allowing you to cherry-pick the best parts. Assets may include intellectual property such as patents or trademarks, an operating website, retail locations, warehouses, trucks, and more. 

Make sure your agreement is highly specific about exactly what comes to you in the sale. You don’t want to realize later that you didn’t get all the assets you wanted.

Merger

In a merger, your existing company comes together with the seller’s company to form a new, third company. There may be tax advantages here in forming a new entity instead of continuing under your existing corporate structure, and combining the two companies may make it easier to operate. 

For instance, your company may buy products from the business you’re acquiring. Once you’re merged into one company, you’ll pay just the cost of goods without a markup.

One advantage of structuring your acquisition deal as a merger is that if the company you’re buying has shareholders, the move only requires approval from a majority of the selling company’s shareholders.

Acquisition Deal Structure Examples

Interested to see how acquisition deal structure works in practice? Here are recent examples of each of the three basic deal structure types:

Stock purchase: Publicly held Zendesk was purchased by a private investor group for $10.2 billion in June 2022. The new owners acquired the company by buying up Zendesk’s stock shares, thereby taking the company private. Zendesk shareholders received a price per share that was 34 percent above the stock’s price at the announcement date.

Asset purchase: Barcelona-based marketing firm PICKASO developed a platform for selling apps back in 2017. Known as TheTool, the platform was sold to app-marketing firm App Radar four years later in a six-figure asset purchase. PICKASO continues to offer clients SEO, design, and content marketing services, but this single tool is now part of App Radar’s offerings. 

Merger: In Feb. 2022, Frontier Airlines and Spirit Airlines announced their merger in a deal valued at $6.6 billion. The merger made Frontier the majority owner of the new company, with Spirit retaining a 48.5-percent stake in the new company. Frontier gave Spirit stockholders roughly 2 Frontier stock shares plus $2.13 cash for each Spirit share owned. A new name for the combined company was expected to be announced in late 2022.

Other Acquisition Deal Structures

There are a few other ways that acquisition deals get structured, but they’re used less often because they have distinct disadvantages.

Seller financing: In this deal structure, the seller doesn’t get their full cash sale price at closing. Instead, they essentially become your bank and finance the remainder. This isn’t ideal because the interest rate will usually be high–and if you default, the seller owns the business again. A last resort some buyers use if they can’t obtain a bank loan.

Equity financing: This one’s for experienced buyers with deep ties to the investor community. The buyer creates a public or private stock offering and sells shares to investors, using the proceeds to fund the purchase. However, your stock offer may not sell out, leaving you short of the needed cash for your acquisition–and now you’re only a part owner, with investors having a say in operations.

Leveraged buyout. Remember leveraged buyouts from the ‘80s? In this deal structure, the buyer borrows money – sometimes at elevated interest rates – to make the acquisition, using the assets of the business to be acquired as collateral. Luckily, things have changed a lot since the “corporate raider” days of the 1980s. Today, this is one of the most popular and successful deal structures.  Many of our clients engage in leveraged buyouts as part of their acquisition strategy.  

Factors To Consider When Determining the Right Deal Structure

Which deal structure is right for you? The best option depends on several factors: 

• Flexibility–If you want to pick and choose particular assets to acquire, an asset purchase deal is called for.

   

• Finances–Do you have (or can you raise) the money to acquire the seller’s company shares? Your deal structure may determine how the purchase will be financed.

   

• Legal issues–Are there legal liabilities you might inherit in this deal, or problems that could arise post-sale? A good attorney should review your deal structure to make sure you choose a deal type that limits your exposure.

   

• Tax consequences–One deal structure may be more advantageous than another when April 15 rolls around. Be sure to consult with a qualified accountant to maximize your tax savings.

Creating Your M&A Deal Structure

Once you’ve decided on the type of acquisition structure you’ll be using, you need to hammer out your agreement. Is this a merger, an asset purchase, a stock purchase, or something else?  For an asset purchase or merger, you’ll need to outline what money will go to the seller, and at what point.

Unless you’re buying this business with existing shares of your own company’s stock, you’ll also need to come up with the funding to make this acquisition. 

If you don’t have the cash on hand–or don’t want to use the cash you have–you’ll need to find, borrow, or raise the money. We’ve got a detailed rundown on different ways to fund acquisitions here. You can also postpone some of your cash payout by structuring your deal as an “earn out.” 

”Cash at Close” vs Earn Outs

In an earn out, only some of the cash is paid at closing. A schedule of payments across the next 1-3 years is mapped out to pay out the balance. 

Often, those earn-out payments are dependent upon the business continuing to perform well–if it doesn’t, the amounts may be reduced. An earn-out deal structure reduces the buyer’s risk because if the business flounders post-sale, you won’t owe as much to the seller.

This is one of the biggest sticking points in acquisition deals. The seller would like to receive their entire valuation in cash at close. And the buyer would like to put 100 percent of the payouts into an earn out to protect their downside. 

Usually, a compromise is found. The devil is truly in the details here–make sure you carefully define what triggers a full payout and what would reduce the earn-out payments. You want to protect yourself in case the business does poorly after the sale closes.  

Get Savvy About Structuring Deals

There are a lot of factors to consider in structuring acquisition deals. You’ll want to build a team of M&A experts to guide you in selecting the right structure for your business purchase. If you need help, check out the DueDilio network of M&A professionals.