Breaking down the most common M&A deal structures

Understanding the basics of various M&A deal structures is key for founders and business owners looking to explore this arena. This post provides an overview of the most common structures so that you can be on the way to making informed decisions that align with your business objectives.

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Asset Purchase

An asset purchase is like a treasure hunt, where the buyer acquires the hidden gems of a company’s assets instead of its stock. These can range from tangible assets like equipment,  inventory, technology platforms, and property to intangible things like patents and customer lists. This strategic approach is a favorite among buyers as it allows them to cherry-pick the desired assets without inheriting any of the company’s liabilities. However, sellers should be aware of the potential tax implications as a result of going this route.

A notable example here is Facebook’s $19B acquisition of WhatsApp in 2014.

Stock Purchase

In a stock purchase, the buyer acquires the target company’s shares from its shareholders, gaining control of the assets and liabilities. This structure can be simpler to execute as it involves a straightforward transfer of ownership. Additionally, this type of transaction allows the buyer to assume the target company’s contractual obligations and legal responsibilities. It also grants the buyer an opportunity to leverage the existing relationships and goodwill of the target company. Moreover, it can result in a lower tax burden for the seller, making it an appealing choice for both parties involved in the transaction.

Reverse Merger

In a reverse merger, what happens is that a privately held company acquires a publicly listed company. This allows the private company to bypass the usual process of going through an initial public offering (IPO). It’s like taking a different, faster, and often more cost-effective route for private companies to enter the public market. 

Forward Merger

A forward merger refers to when the buyer merges with the target company, allowing the target company to continue as the surviving legal entity. This type of merger can streamline the integration process, catalyzing efficiency by consolidating resources, systems, and operations. Something to be aware of here is that as a result of the merger, the target company takes on the buyer’s obligations, liabilities, and commitments. 

A notable example would be Disney’s acquisition of Pixar resulting in the consolidation of their assets and continuation of business under the Disney corporate umbrella.

In the world of M&A, different deal structures serve strategic purposes. Entrepreneurs must consider the advantages and constraints of each model when pursuing specific technologies, market segments, or growth opportunities. From asset purchases to consolidation, these frameworks pave pathways to corporate evolution.

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