Mergers and Acquisition: Choosing an Optimal Structure for your Firm’s Transaction

During these unprecedented times, firms have had to acclimate to new strategies, adapting creatively to the changing environment. One strategy that has recently gained momentum in the business world is Mergers and Acquisitions (M&A). Executives have found that successful M&A activity can provide greater financial strength and growth to their firms.


For those firms that are planning to embark on an M&A strategy, it is imperative to understand and select the best structure for the transaction. Every M&A transaction is unique and complex, which is why it is necessary first to understand the various deal structures in M&A transactions. The wrong choice could lead to negotiation difficulties and tax disadvantages that could derail the deal.


This article aims to help executives choose the best structure that works best for their firms and would lead to the success of the M&A activity. We will provide an overview of the three principal deal structures a firm should be familiar with before diving into the M&A strategy.


Watch our video below or read the article underneath to understand more!

Deal Structures in Mergers and Acquisitions


1. Stock Acquisition

In a stock acquisition, the buyer purchases all the target firm’s outstanding shares of stock directly from the target firm’s stockholders for cash or other consideration. After the transaction is completed, the buyer controls 100% of the target firm’s shares, and the target

firm becomes a subsidiary of the buyer. The target firm will remain intact but with new ownership.


This is usually seen as the simplest form of transaction for small business transactions to carry out. As long as there is a manageable number of target firm stockholders, this is frequently a more straightforward transaction structure than an asset purchase or a merger.


One advantage of this type of transaction for buyers is that the seller continues to manage operations, allowing the buyer to avoid a lengthy — and costly — integration. Nonetheless, because the buyer controls all contracts, intellectual property, and assets, it is simple to begin reaping value from the transaction. Furthermore, all-stock purchase talks are less contentious.


The disadvantage to this structure is that because a buyer inherits all the seller’s existing liabilities, the buyer may incur legal and financial issues that lower the transaction value. If the selling business has disgruntled shareholders, a stock acquisition will not make them go away. In fact, dissenting shareholders can become a painful thorn in the buyer’s side once it assumes majority ownership.


2. Asset Acquisition


In an asset sale, the buyer gets to choose whatever assets and liabilities he wants to take on, and he usually agrees to absorb certain liabilities of the target firm. After the transaction, the selling firm continues to exist legally and is accountable for any liabilities that the buyer does not incur.


The “assets” that the buyer may seek to purchase will include everything from machinery to equipment to inventory to real estate, contract rights, accounts receivable, intellectual property, etc. The buyer often absorbs liabilities linked with the bought assets, such as accounts payable, contract obligations, employment-related liabilities, etc.


An asset purchase may be the ideal transaction structure from the buyer’s perspective, since it allows the buyer to avoid spending cash on undesirable assets and avoid known and unknown liabilities of the target firm that it does not want or need to incur. Furthermore, an asset acquisition may create better tax treatment for the buyer than a stock transaction.


An asset purchase may be desirable from the standpoint of the target company and its investors if the target firm is not selling its entire business, since it is the easiest approach to deal with a subset of assets.


3. Mergers

In a merger, two distinct companies unite to become one legal entity, and the owners of the target firm get cash, buyer company shares, or a mix of the two. When two firms agree to combine, a contract called the “merger agreement” or “plan of merger” is usually drafted, which tells the shareholders of each firm what they would get following the merger.


One of the firms in this structure will “survive” the merger and continue to operate, while the other company will cease to exist. “The surviving company will often be called the “surviving corporation,” while the other company will be referred to as the “disappearing corporation” or the “merged corporation.” Once the merger is completely finished, the surviving corporation will assume all the assets and liabilities of the disappearing corporation.”


The upside to a merger for both parties is that it only requires the approval of a simple majority of shareholders, and minimal negotiations also take place because all assets and liabilities are instantly passed to the acquirer.


Bottom Line


The decision to choose a structure for M&A transactions varies depending on the situations of the participating firms. There are various routes (structures) of business transfer. Each route has different financial implications as well as benefits and drawbacks. Both the buyer and seller have to make a sound selection about which structure to utilize. It is crucial to the purchase of the undertaking to ensure a seamless and cost-effective transfer of the transferee firm. Every deal must examine complex commercial, legal, tax, and other aspects to identify the “optimal” structure of the M&A transaction.


If you intend to sell your firm or merge with another, you’ll need to find the perfect buyer who will not devastate all of the many hours and money you’ve invested in growing it. HWA Alliance of CPA Firms, Inc. is the ideal buyer for your firm’s transition. We have an excellent track record of completing mergers and acquisitions deals with CPA firms. We work diligently to offer our prospective partners and target firms competitive pricing, and create opportunities to strategically position our partner and target firm to continue doing business under the umbrella of HWA Alliance of CPA FirmsInc. Our successful M&A initiatives assist our potential partners and target firms enter new markets, add-on complementary goods and services, gain access to new technology, and most important of all safeguard their legacy whilst enhancing overall growth and success. 



-John Wright



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