How to Structure M&A Deals to Maximize Value

Mergers and acquisitions (M&A) can be transformative milestones for businesses, marking significant growth opportunities or successful exit strategies. However, navigating the complexities of M&A transactions is no small feat. From tax implications to deal structure, the process requires meticulous planning, expert guidance, and a clear understanding of priorities. In this article, we explore the essential insights shared by Simon Kinder, corporate partner at Bridgeaw LLP, on how to structure M&A deals to maximize value while managing risks effectively.

This guide specifically addresses growth-oriented entrepreneurs and mid-market business owners who are preparing to scale, acquire, or sell their companies. Whether you're on the buy-side or sell-side of an M&A deal, this article will equip you with actionable strategies to achieve optimal outcomes.

Understanding the Foundation: The Importance of Early Planning

One of the first takeaways from Simon Kinder’s insights is the critical importance of starting the M&A process early and engaging professional advisors at the initial stages. Entrepreneurs often focus solely on running their businesses, leaving key transaction considerations unaddressed until later in the process. However, early discussions can uncover essential factors that shape the deal structure and ensure a smoother transaction.

Key Initial Considerations:

Client Goals: Is the priority a complete exit, growth through acquisition, or legacy planning? Identifying the client’s long-term objectives is foundational.
Tax Strategy: Tax implications must drive structural decisions. How much money ends up in your pocket (or how much financing you need) depends heavily on the transaction’s tax efficiency.
Post-Transaction Plans: How long does the seller want to remain involved with the business? Will the buyer require the seller’s continued participation through earnouts or rollovers?

By answering these questions upfront, entrepreneurs can align their strategies with desired outcomes, gaining clarity on potential challenges and opportunities.

Asset Sale vs. Stock Sale: Structuring the Deal

A pivotal element of any M&A transaction is determining whether it should be structured as an asset sale or a stock sale. This decision significantly impacts tax liabilities, legal responsibilities, and the overall transaction dynamics.

Asset Sales:

Preferred by Buyers: Buyers favor asset sales because they can "cherry-pick" the assets they want while excluding liabilities. Additionally, buyers benefit from a step-up in basis - adjusting the tax basis of assets to their purchase value, which enables future tax advantages.
Less Favorable for Sellers: Sellers may face higher tax burdens in asset sales, as proceeds are often taxed twice (at the corporate and personal levels for C-corporations).

Stock Sales:

Preferred by Sellers: Sellers typically prefer stock sales, as they allow for a clean break, transferring all liabilities to the buyer. From a tax standpoint, stock sales often result in a single layer of taxation, making them more advantageous for the seller.
Less Attractive for Buyers: Buyers inherit all liabilities, contracts, and risks tied to the business when acquiring stock.

Bridging the Gap: Hybrid Structures

When buyers and sellers have conflicting preferences, hybrid structures like 338(h)(10) or 336(e) elections can create win-win scenarios. These enable stock sales to be treated as asset sales for tax purposes, satisfying both parties. Understanding and leveraging these options can unlock significant value in negotiations.

Tax Efficiency: The Driving Force Behind M&A Structures

Tax considerations are indispensable in M&A transactions. Kinder emphasizes that tax strategy should guide deal structuring - ensuring both parties maximize their financial outcomes while minimizing inefficiencies.

Qualified Small Business Stock (QSBS): Entrepreneurs who qualify under Section 1202 of the tax code can exclude significant amounts of capital gains from federal taxes upon selling their stock. Eligibility criteria must be addressed early in the business lifecycle.
Tax-Free Contributions and Rollovers: Buyers often want sellers to retain equity in the business post-transaction. Structuring deals with tax-deferred rollovers can align incentives while reducing immediate tax liabilities for sellers.
Installment Sales: Sellers can structure payments over time, spreading out tax liabilities and potentially reducing the overall tax burden.

A proactive approach to tax planning ensures that both buyers and sellers understand the financial implications of the deal and can negotiate terms accordingly.

Navigating Cross-Border Transactions

For businesses engaging in international M&A, cross-border complexities add another layer of challenges. Kinder highlights two crucial aspects to consider:

1. Cultural Sensitivities

Cultural differences can significantly impact negotiations and deal dynamics. Misaligned expectations or misunderstandings across jurisdictions can derail deals. Advisors must adopt a client-centered approach, respecting cultural nuances and adapting processes to bridge gaps.

2. Regulatory Compliance

Cross-border transactions often trigger regulatory reviews, such as:

CFIUS (Committee on Foreign Investment in the US) notifications
OFAC (Office of Foreign Assets Control) compliance
Export control laws and anti-corruption requirements

Identifying these issues early and addressing regulatory obligations is essential to avoid delays or failed deals.

Due Diligence: Avoiding Pitfalls and Managing Risk

The due diligence phase is one of the most critical and often daunting aspects of M&A transactions. Buyers will scrutinize every aspect of the seller’s business, requesting detailed information on:

Employment policies and contracts
Litigation or compliance issues
Environmental liabilities
Supplier and vendor agreements

For sellers, preparing for due diligence means ensuring transparency, accuracy, and full compliance with buyer requests. Misrepresentations, whether intentional or accidental, can lead to indemnity claims or litigation after the deal closes. Proper preparation minimizes risks and builds trust between parties.

Aligning Incentives: Earnouts and Contingent Considerations

Aligning incentives between buyers and sellers is a common challenge in M&A. Earnouts and contingent considerations are often used to bridge gaps in valuation and ensure post-transaction alignment.

Examples of Contingent Mechanisms:

Earnouts: Sellers receive additional payments if the business meets specific performance targets post-closing.
Purchase Price Adjustments: Final valuations may be adjusted based on working capital, revenue, or other metrics at closing.

Clear agreement on these mechanisms, including milestones, timelines, and measurement criteria, is essential to avoid disputes.

Conclusion: The Blueprint for M&A Success

Structuring an M&A deal to maximize value requires a blend of legal creativity, tax precision, and a deep understanding of both parties’ goals. By addressing key considerations early, focusing on tax efficiency, and navigating due diligence with care, entrepreneurs can achieve favorable outcomes while minimizing risks.

While every deal is unique, the principles outlined here provide a roadmap for mid-market business owners preparing for transformative transactions. Careful planning, expert guidance, and a strategic approach are the cornerstones of a successful M&A journey.

Key Takeaways

Start Early: Engage advisors at the earliest stages to uncover key considerations and avoid surprises.
Understand Deal Structure: Asset sales favor buyers, while stock sales favor sellers. Hybrid structures like 338(h)(10) elections can satisfy both.
Prioritize Tax Efficiency: Tax strategy should guide structural decisions to maximize financial outcomes for both parties.
Prepare for Due Diligence: Sellers must be transparent and thorough to avoid disputes or claims after the deal closes.
Navigate Cross-Border Complexities: Address cultural sensitivities and regulatory compliance early in international transactions.
Align Incentives: Use earnouts or contingent considerations to bridge valuation gaps and align post-deal goals.
Focus on Long-Term Objectives: Structuring the deal must reflect both short-term needs and long-term aspirations, such as legacy planning or growth.

Aligning expertise with careful planning ensures smoother, more profitable transactions. Entrepreneurs should approach M&A with the mantra: measure twice, cut once. With the right strategies, businesses can unlock transformative opportunities through mergers and acquisitions.

Source: "How to Structure M&A Deals for Maximum Value | Expert Insights from Bridge Law LLP" - Bridge Law LLP, YouTube, Jan 1, 1970 - https://www.youtube.com/watch?v=qsMCzm21jys