The Deal’s Structure
Now it is time to discuss the structure of the deal. Will your client only want to purchase certain assets? Will your client want the entire business? Will it be a stock or asset deal? What are the tax ramifications?
What you learn during the due diligence process can impact the deal’s structure. For instance, if you find something your client doesn’t like but they still want to go through with the deal, what do you do to protect your client? You need to take this into account when structuring the deal.
I am going to insert a side note here regarding ethics and collaboration. You represent your client, and you need to always be mindful of that. However, part of representing your client is helping it achieve its goals. Here, if the goal is to acquire another business, then you have to help the deal move forward. Playing hardball with the target’s counsel on everything, including things that won’t really negatively impact your client, is foolish. Take to heart that your job is not only to do what is in your client’s best interests but also to compromise where it is possible to move the deal forward.
The main structures we will discuss are an asset purchase, stock purchase, and a joint venture.
Asset Purchase
Description
In an asset purchase, the purchaser picks and chooses which assets it wants and leaves the rest with the target company. The target company survives even in cases where it is not left with much. One must pick and choose the assets carefully. In addition to assets, the purchaser gets to decide which liabilities to take on. Perhaps the purchaser wants the fleet of trucks and two of the trucks are encumbered with outstanding loans. The bank will not allow the trucks to be transferred unless the loans are either paid off or the loans are assigned to the purchaser. What happens to the liabilities is an important consideration in an asset purchase and should not be overlooked.
Example: Target Corp has inventory, equipment, office furniture, intellectual property, and a company plane. Purchaser wants the intellectual property, inventory, and equipment but not the furniture and plane. The purchaser works out a price for these assets and Target accepts. Title and physical possession of the assets will move to the purchaser.
Target in the above example will likely have to sell the rest of its assets, satisfy any liabilities, wind up and dissolve unless it has other assets or a way to continue its business.
The purchaser can either absorb the new assets into his business or can set up a new entity in which to transfer them.
Tax Considerations and Consequences
Unless the transaction qualifies as an IRC § 368 reorganization and gains favorable tax treatment, the deal will be treated like an asset purchase. If it is treated as an asset purchase, the assets have a cost basis for the purchaser and the purchaser has no gain or loss in the transaction. However, the target will recognize gain or loss on the assets being sold base