The Structure of Private Acquisitions
Many startups are founded with the end goal of being acquired, as it allows the founders to cash out after a short period of time. There are three primary forms of private acquisition structures: merger, asset acquisition, and stock acquisition. These can be applied to different scenarios, whether you’re selling to another owner, distributing your assets, or joining forces with a major competitor.
Elements of Private Acquisition
While there are a variety of specific aspects to take into account before choosing an acquisition structure, corporate attorneys typically advise that you place particular emphasis on tax benefits and consequences, current ownership structure market & commercial considerations, and ownership intent.
The seller may benefit by structuring an asset acquisition as a tax-free reorganization as opposed to a taxable sale, while a buyer may profit from an asset purchase if the seller retains tax liability. A purchase that is both successful and economical must address the interests of the buyer and seller.
The broad definition of a business merger is “the absorption of one corporation into another,” in which one company takes on all the obligations and assets of another. Both direct and indirect mergers occur. The target company (seller) and the acquirer (buyer) are the two parties involved in a direct merger. In a direct merger, the acquiring firm buys the target business, which is then entirely integrated into the acquiring company’s business. For instance, if Corporation A buys Corporation B, both companies are now part of Corporation A. Due to the involvement of three parties, one of whom protects the purchase from certain seller responsibilities, an indirect merger may be advantageous to the buyer. In an indirect merger, the buyer establishes a fully-owned subsidiary, and the subsidiary then merges directly with the target business. The target company effectively becomes the buyer’s wholly owned subsidiary, although, in either situation, the target company’s existence is completely erased.
A buyer only buys specific target assets in an asset acquisition, ie. a division or subsidiary of the target business. For instance, a buyer might want to buy every company connected to one patent while maintaining the target company. An asset purchase is advantageous to the buyer because it has more tax advantages for the purchasing corporation, is less risky than a merger, and allows for the choice of assets and liabilities.
Stock only acquisition may be necessary to resolve expected issues with dissident shareholders. In this scenario, the buyer directly acquires the majority of the target company’s shares from the owners, giving it complete control over all of the target company’s assets and obligations. As long as the target company keeps its identity, it becomes a subsidiary of the buyer, which may or may not be entirely owned. The target company is not necessarily dissolved, unlike in a merger. Unless it merges with the acquired company after the original stock transaction, it keeps its identity.