The Pros and Cons of 5 Different M&A Transaction Structure Options

Manufacturing M&A transactions can be complex. The deal structuring process is critical to ensure a smooth and successful transaction. As a lawyer specializing in transactional law for 25 years, I have developed a specialty representing manufacturing companies in the M&A space. I’ve seen many deals fall apart due to poor structuring or a misunderstanding of the objectives or options available in these kinds of transactions.

Let’s discuss the pros and cons of five typical deal structures in the manufacturing industry deal space.

Asset Purchase Versus Stock Purchase

One of the first considerations in a manufacturing M&A transaction is whether to structure the deal as an asset or stock purchase. In an asset purchase, the buyer purchases specific assets of the target company, such as inventory, equipment, accounts receivable, and intellectual property, but not the entire company. In contrast, a stock purchase involves the purchase of all outstanding shares of the target company, including all of its liabilities.

There are advantages and disadvantages to each structure. An asset purchase can be advantageous if the target company has liabilities or legal issues the buyer wants to avoid. By purchasing assets, the buyer can avoid these issues. Additionally, an asset purchase can result in tax benefits for the buyer.

On the other hand, a stock purchase can provide the buyer with a more straightforward ownership transition. In many cases, the buyer can benefit from the target company’s existing relationships, contracts, and licenses without assigning them to a new entity or seeking consents. Additionally, there can be significate tax advantages to a stock sale for the seller.

Other Potential Structures

Other structures include mergers, joint ventures, and spin-offs. Each structure has its unique advantages and disadvantages, and selecting the appropriate structure depends on the specific circumstances of the transaction.

Mergers involve two or more companies coming together to form a new company. This structure may allow for cost savings, improved efficiencies by eliminating redundancies and qualify as “tax-free” under the applicable tax code. However, it can have more significant regulatory hurdles and integration challenges.

Joint ventures involve two or more companies forming a new entity to carry out a specific business purpose. This structure may allow for sharing risks and costs. However, it can have complex negotiations over ownership and control of the new entity.

Spin-offs involve a parent company divesting a portion of its assets into a new separate company. This structure may allow for the parent company to focus on its core business while allowing the spun-off company to operate independently and pursue its own strategic goals. However, it can increase operational costs by disrupting synergies.

Work with an Expert

The deal structuring process is critical in manufacturing M&A transactions. Post-closing issues such as purchase price adjustments,  earn-outs, employment agreements, non-competes, transition agreements, and other potential issues should be carefully considered to ensure a successful transaction. As a transaction lawyer, I can guide you in structuring your deal, both domestically and overseas, and help you navigate the complexities of the transaction process. Get in touch with me today to learn more.

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This post was written by Daniel Novela