In an acquisition transaction, each party will have their own motivations towards closing the deal. Depending on the nature of the buyer and seller and the motivation each have, it is important to take a step back to determine the exact acquisition structuring that will best deal with the transaction.
Common Acquisition Process
The Acquisition process has common elements:
- Preliminary discussions/start of auction process;
- Confidentiality agreement;
- Letter of intent (if necessary);
- Due diligence;
- Negotiating terms;
- Execution of documents;
- Cooling off period (if necessary); and
- Resolution of any issues post-execution
When coming to an agreement, you need to consider how assets and other properties are to be acquired.
The acquisition of assets is negotiated through a formal asset acquisition agreement. The acquisition of assets can be purchased through cash or through the stock of the Buyer. The Seller will then pass on this consideration to their shareholders.
It is important to also consider whether certain assets carry associated liabilities, and whether as a buyer, you are willing to take on these liabilities as part of the asset acquisition.
The acquisition of stock is completed through a stock purchase agreement, in much the same way as you would acquire assets. However, the acquisition of stock is negotiated trough the stockholders directly as opposed to the Seller.
Different types of mergers/acquisitions
Each transaction is unique and it may not be in your best interests to proceed with a straight forward merger, taking into account the nature of each business, the assets and stock, and the views of the shareholders.
There are common types of mergers that you may want to consider when determining the right acquisition structure. These include:
- Straight Merger;
- Forward Triangular Merger; and
- Reverse Triangular Merger
A straight merger is where the buyer purchases the assets and stock from the Seller. Following the purchase, the Buyer takes on the assets and stock of the Seller.
If the buyer has offered stock in their business to the shareholders of the seller, then the shareholders are now the shareholders of the buyer.
Forward Triangular Merger
A forward triangular merger is where the subsidiary of the buyer merges into the seller. The Buyer provides the consideration amount for the purchase of the assets and stock. The subsidiary is the surviving entity.
Reverse Triangular Merger
A reverse triangular merger works in the same way as a forward triangular merger, however, the only difference being that the subsidiary is the surviving entity.
This form of acquisition is utilised where the Buyer wishes for the subsidiary to take on the business name of the seller.
Whether you are the buyer of seller, you may want to take into account the following considerations:
- Nature of the business you are buying and its current financial circumstances;
- Shareholders – it may not be worth attempting to sell where there are numerous shareholders (as all must agree to sell);
- Tax implications of purchase;
- Whether you are able to seek shareholder approval;
- Your bargaining positions;
- Financing structures;
- Risk issues – e.g. unassumed liabilities, product liability, and any fraudulent conveyance risks; and
- Statutory compliance and/or any regulation compliance
How can we help?
At JB Solicitors, whether we are representing a buyer or seller, it is our role to provide advice as to the structuring of the acquisition, the sale process, and evaluating on bids from multiple buyers. We also provide advice on your due diligence within the transaction and assist you in negotiating and preparing a smooth acquisition. Contact JB Solicitors today so that we may assist.