Introduction#
Deal-structuring process begins with addressing a set of key questions that help define initial negotiating positions, potential risks, options for managing risk, levels of tolerance for risk, and conditions under which the buyer or seller will “walk away” from the negotiations.
Elements of Deal Structuring#
| Elements | Content | Implications |
|---|---|---|
| Form of payment | 1. Total consideration may consist of cash, common stock, debt, or a combination of all three. 2. The payment may be fixed at a moment in time, contingent on future perfor mance of the acquired unit, or payable over time. | Selection of the appropriate form of acquisition and post closing organization. |
| The form of acquisition | 1. what is being acquired (stock or assets) 2. how the ownership of assets will be conveyed from the seller to the buyer, either by rule of law as in a merger or through transfer and assignment as in a purchase of assets. | Tax considerations. |
| Tax considerations | Tax structures and strategies that determine whether a transaction is taxable or non-taxable to the seller’s shareholders, which affects the potential for double taxation and the allocation of losses to owners. | Choice of post-closing organization |
| Accounting considerations | The potential impact of financial reporting requirements on the earnings volatility of business combinations due to the need to periodically revalue acquired assets to their fair market value as new information becomes available. | Tax implications. |
| Choice of legal form of the selling entity | Whether it is a C or S chapter corporation,LLC,or partnership | liability, tax, and financing implications |
| Choice of Acquisition Vehicle | The legal structure created to acquire the target company. | |
| The post-closing organization | Organizational and legal framework used to manage the combined businesses following the consummation of the transaction, such as corporate or divisional, holding company, joint venture (JV), partner ship, limited liability company (LLC), and employee stock ownership plan (ESOP) structures. | liability, tax, and financing implications |
Key Deal-Structuring Questions:#
Acquisition Vehicle related questions#
- Who are the participants and what are their goals?
- What are the perceived risks?
- How can the risks be managed?
- How will the combined businesses be managed after the closing?
- Are the businesses to be integrated immediately?
- What should be the legal structure of the new firm?
- Does the deal need to be done quickly?
- Does the target have large off-balance sheet liabilities?
Form, Amount, & Timing of Payment related questions#
- What is the business worth?
- What is the composition of the purchase price?
- Will the price be fixed, contingent, or deferred?
- What liabilities are to be assumed by the buyer?
- How will risks be shared before and after closing?
- How will due diligence issues be resolved?
- How will key employees be retained?
- How will the purchase price be financed?
- What is the legal form of the selling entity?
- What is the composition of target shareholders?
- What is being acquired? Stock or assets?
- Will buyer assume any liabilities?
Form of Acquisition Related Questions#
- Will there be minority shareholders?
- How will assets be transferred to the buyer?
- What is the tax impact on the buyer and seller?
- Will the tax impact affect the purchase price?
- What third-party consents, shareholder approvals, and regulatory filings are necessary?
- Is the seller a C or S corporation, LLC, or partnership?
- What seller “reps” and warranties will be required?
- Are key contracts assignable?
- Does the target have tax credits and NOLs?
Reference#
- Mergers and acquisitions Basics Negotiation and Deal Structuring by donald dePamphilis, Academic Press (2011)
