How to Structure Transaction

Entrepreneurs may prefer to buy an already existing company instead of starting a new one. This allows them to avoid dealing with star-up matters and to acquire a developed business entity with an existing reputation, connections, contracts, and customer base. The main issue in this situation is the risk of inheriting not only the privileges of that company, but also any drawbacks that may be present. One of the main concerns of the buyer should be present liabilities and the possibility of their emergence in the future. Improper legal compliance, as well as other types of noncompliance, may bring negative consequences long after the transaction is completed.


There are various ways to structure the acquisition of the existing business. The preferred method depends on the present facts, the buyer’s and seller’s purposes and goals, and the possibility of limiting liability and reducing tax burden. All available methods should be carefully considered and discussed with an attorney as soon as the parties express interest in a deal and certainly before proceeding with further negotiations.  


It is important to remember that preliminary agreements may be enforced in the same way as the final ones. Therefore, parties should not agree to something without first privately consulting with their respective attorneys. An experienced business attorney may identify some issues or concerns that entrepreneurs may not initially anticipate, will advise them on the consequences of various offers, will propose the best possible solutions and practical tips for structuring the transaction and accomplishing their goals, and will otherwise guide the parties through the whole process, making sure everything goes smoothly and is completed in due course.


Most acquisitions are accomplished by way of a stock or membership interest purchase, an assets purchase, or a merger. Each has its particular upsides and downsides for the buyer and the seller. You should be aware of these and evaluate each carefully before making a decision to buy. 


Stock or Membership Interest Acquisition


The purchase of shares or membership interest may be a simple form of acquisition if there are only a few stock or interest holders and all are willing to sell. However, if it is a publicly traded company with more that 500 shareholders and the buyer is acquiring 5 percent or more of the company’s interest, he or she has to provide certain disclosures and register with the Securities and Exchange Commission (SEC), the primary federal agency that regulates securities transactions within the United States. If the buyer is acquiring the interest in the target company not with cash but by exchanging company’s securities for the securities of the target company, the buyer also has to file certain information and disclosures with the SEC. One of the SEC’s primary functions is to ensure full and accurate disclosure of financial and business information on all securities bought and sold in the United States. The SEC has authority to bring enforcement actions for noncompliance, which may result in extremely high penalties and even criminal charges if some kind of bad intent is detected.


Advantages: When shares are acquired, all assets remain in the target company, including its contracts, intellectual property, licenses, permits, and franchises. Few transfer documents are required. Transfer taxes are relatively low or nonexistent. However, the requirements for special permits and licenses must be verified before the transaction to make sure a change in company control will not automatically terminate the existing ones. The buyer should be certain whether or not he or she will be required to apply for those documents again.


Disadvantages: The main disadvantage in a share or membership interest acquisition is that the target company will usually retain its tax attributes, both favorable and unfavorable. Assuming that the business is continued, all legal liabilities—past, present. and the ones that may appear in the future—are transferred to the new owner. The new owner is fully responsible for all liabilities, taking the place of the previous owner(s). Nevertheless, it is possible to negotiate the allocation of liability between the buyer and the seller in the purchase agreement and have the seller agree to indemnify the buyer in case of undisclosed or unforeseen liabilities. Also, the transaction may be cumbersome if the buyer does not want to acquire a target company in its entirety. If the buyer is not interested in some part of the target company’s business field or assets, it is better to consider another method of transaction. In certain cases, the target company may agree to get rid of the unwanted business or assets prior to an acquisition and prepare the company to to the buyer’s liking. Bear in mind that the legal and tax aspects of a corporate split are complicated in the United States.


Asset Acquisition


In asset acquisition, the purchaser does not buy the company as a whole, but instead selects only the company assets that are of interest. Generally, the buyer then forms a new company, such as a corporation, LLC, or partnership, and this company will acquire all desirable assets from the target company.


Advantages: The buyer chooses exactly what he or she wants. For instance, if one is interested in only one line of business or one division of a company, an asset purchase is the most straightforward way to accomplish this. The liabilities stay with the target company, since it is only selling its assets, but the company continues its existence with the previous owners. In some cases, however, depending on the nature of the acquired assets the liabilities still may flow to the new owners. For example, property taxes are liens on the acquired real estate, and environmental and pension liabilities may become the responsibility of any subsequent owner under certain circumstances.


Disadvantages: Favorable tax attributes, licenses, permits, and contracts of the target company will not pass to the buyer in an asset acquisition. It is not usually difficult to obtain new consent from public or private parties merely because the owner has changed, but it may be time consuming. Each asset must be separately investigated and evaluated to make sure it is not subject to attachment by creditors of the seller or has other inherent liabilities. 




In a merger, two entities are joined by the operation of law. Normally, one entity disappears and the other continues as the successor to its business. All assets and liabilities become the property of the surviving entity. If the target entity, but not the acquiring entity, is to be the surviving company, this is called a reverse merger. To be effective, merger documents must be filed with the state. The target company members or stockholders may be eliminated by buying out their interest in a target company or by converting their shares into the shares of the buyer or any other company.


Advantages: The transfer of all assets and the exchange of target company shares or membership interest are automatic. No separate transfer documents are required. Normally, the transaction is absolutely tax-free.


Disadvantages: As in a stock or membership interest acquisition, all liabilities of the target company flow to the new owner. Also, a merger with a publicly held corporation may be time consuming because of the need to hold a meeting of the stockholders and to comply with the U.S. proxy rules. If a target company is attractive to other potential bidders, they may use this procedural delay to compete for the target by offering an increased price for the shares or creating other obstacles that will buy them time. It is not an issue if a buyer has a preliminary official agreement from a sufficient number of interest holders, which allows the transaction to proceed. Any remaining or disagreeing stock or membership interest holders can be eliminated through a cash-out merger of the acquisition vehicle with the target company.

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