Transaction Structure: Looking Beyond the Purchase Price
Purchase price represents only one component of an offer to acquire a lower middle market business. An M&A transaction structure may significantly influence risk, proceeds, taxes, financing, and the seller’s obligations after closing.
Consequently, sellers should not automatically dismiss an offer simply because another buyer proposes a higher headline price. A properly structured lower offer may provide greater certainty, better terms, or more favorable after-tax proceeds.
The two most common acquisition structures involve purchasing assets or acquiring the seller’s equity. Each structure creates different economic, legal, accounting, and tax considerations for buyers and sellers.
In an asset sale, the buyer acquires specifically identified assets and assumes certain agreed liabilities. Buyers often prefer this structure because they may select the assets and liabilities included in the transaction. Additionally, buyers may receive favorable tax treatment from the acquired assets under applicable tax rules.
Conversely, sellers may prefer an equity transaction under certain circumstances. The buyer acquires the ownership interests of the company rather than purchasing individual assets. As a result, contracts, licenses, permits, and other relationships may remain with the existing legal entity. However, change-of-control provisions and required consents may still apply.
An M&A transaction structure also extends beyond the choice between an asset and equity sale. Buyers and sellers must evaluate several other components, including:
- Cash paid at closing
- Seller financing
- Earnout payments
- Rollover equity
- Escrow and holdbacks
- Working capital adjustments
- Assumed liabilities
- Employment or consulting arrangements
Each component affects the overall economics and risk of the transaction. For example, additional cash at closing provides greater certainty than contingent consideration. Alternatively, rollover equity may provide future upside while exposing the seller to continued investment risk.
Taxes may also materially influence transaction economics. However, the tax consequences depend on the seller’s entity structure and specific transaction terms. Therefore, sellers should involve qualified tax advisors before agreeing to a structure.
The highest purchase price does not always represent the best transaction. Sellers should compare offers based on total economic value, risk, certainty, timing, and their personal objectives.
An experienced M&A advisor may help sellers evaluate competing structures and understand their economic differences. Ultimately, the right M&A transaction structure should balance value, risk, flexibility, and the objectives of both parties.
