The 5 Legal M&A Deal Structures 

All Business Sales Fall Under These Basic Structures
As a potential seller, you must understand that price or business valuation is not the only important term you will need to negotiate with a potential buyer. Another hugely important issue is the M&A deal structure. All business sales can be structured in one of five ways:

  1. A direct statutory merger of the target company into the acquiring company;
  2. A forward triangular merger of the target company into the newly formed acquisition subsidiary of the acquiring company;
  3. A reverse triangular merger of the acquiring company acquisition subsidiary into the target;
  4. The acquiring company purchases the shares or other ownership interests of the target company from the target company shareholders or members directly or through an acquisition subsidiary; or
  5. The acquiring company purchases the assets from the target company.

Each of these five methods of acquisition is illustrated below.
Direct Statutory Merger
A direct statutory merger is a common merger in which the acquiring company acquires all of the target company's assets and liabilities. The target company then operates under the surviving company's name and is considered liquidated. All target company shareholders are either compensated for their shares or hold shares in the surviving company.
Forward Triangular Merger
In a forward triangular merger, also known as an indirect merger, the target company merges into a subsidiary of the acquiring company. This M&A deal structure normally takes place when the merger combines both cash and stock. Because the target company is merging into a subsidiary rather than directly into the acquiring company, the acquiring company is protected from the target's liabilities.

Concerning shareholders, the acquisition subsidiary compensates the target's shareholders with stock, but up to 50% of their compensation can be in the form of cash and other non-stock options.
Reverse Triangular Merger
The common reverse triangular merger, like a forward triangular merger, also shelters the acquiring company from the target's liabilities because it is not a direct merger. However, in this case, the acquisition subsidiary is not the surviving company. Instead, it purchases the target company and merges into it as a wholly-owned subsidiary of the acquiring company. The buyer's stock or cash is issued to the target company's shareholders.

The reverse triangular merger is a popular M&A deal structure because the surviving target company is preserved. So it keeps its business contracts and does not have to transfer its assets to the acquiring company, which may not be possible otherwise with anti-assignment clauses. This method allows the acquiring company to access and control the target's business contracts, preserving the target's business continuity.
Acquiring Company Purchases Shares of Target Company
A share sale is more straightforward than a merger. In a share sale, the acquiring company purchases the target company's stock from its shareholders. Rather than merging companies and dealing with complex contract reassignments, the target company retains its name and business contracts under a new owner.
Acquiring Company Purchases Assets from Target Company
An asset sale does not deal with the target company's shareholders. Instead, the acquiring company chooses specific assets (and sometimes assumes liabilities) that it wants to purchase and finds valuable. The target company remains in operation and does not have to merge or liquidate
Which Structure Should You Choose?
As can be seen by reviewing the charts of each M&A deal structure, there are four methods to purchase the shares in a company and one way to buy a company's assets.

The four share purchase methods include the three merger varieties plus the purchase of the target company's shares from the target company shareholders. In contrast, there is only one acquisition method by which the acquiring company purchases the target company's assets shown in the above diagrams.

Therefore, the question presented to you, the seller (as well as any buyer), is whether the four share acquisition methods should be employed or whether the asset acquisition method should be employed to effectuate the sale of the company's business.

Each deal structure has its tax advantages (or disadvantages), business continuity implications, and legal requirements. These factors should be considered when choosing the best deal structure for your business.

Whether you want to sell or buy a business, Chapman Associates provides a personalized service, based upon our sixty-two years of successful M&A closings and our relationships with more than 9,300 registered buyers. Chapman is one of the most respected middle-market M&A firms in the country. What makes Chapman different from the competition?

• We make a market for our clients.
• We do not charge any up-front fees.
• Our fees are based on successfully completed transactions.
• We devote senior-level attention to every M&A transaction.
• We do not delegate work to junior staff.
• We help clients set realistic goals and then work hard to exceed them.
• We conduct in-depth research and rigorous analysis.
• We prepare all necessary offering materials.
• We have seventeen offices nationwide to serve our clients.
Mark Mroczkowski
Managing Director
mark@chapman-usa.com
407.580.5317