What are the primary structures for selling a business?

Takeaway: Selecting the best structure is critical to the success of acquisitions. There are three principal ways to sell a business: merger with the buyer or a subsidiary of the buyer, selling the target company’s stock, and selling the target company’s assets. Which method is appropriate depends on commercial considerations, third party consent requirements, and tax considerations.

The process of selling a startup can be complex, with several potential deal structures to consider. The two most common types of deals include asset sales and stock sales, each of which has different implications for the buyer and the seller.

Asset Sale

In an asset sale, the buyer acquires specific assets and liabilities of the company, rather than the company itself. These assets can range from tangible items like property, plant, and equipment to intangible ones such as intellectual property, customer lists, and goodwill. The specific assets and liabilities to be transferred are usually outlined in detail in the purchase agreement. After closing, the buyer and the startup retain their separate corporate structures and the startup retains any assets and liabilities not purchased by the buyer.

Asset sales provide the buyer with a certain degree of protection, as they can choose to leave behind liabilities they don't want. For sellers, however, asset sales can be less tax efficient than stock sales, they may get stuck with liabilities they don’t want, and the transaction may require consent from third parties for transferring contracts and licenses.

Stock Sale

In a stock sale, the buyer purchases the shareholders' stock directly from the startup’s stockholders, effectively taking over the entire company, including its assets and liabilities. After closing, the startup retains its corporate existence and becomes a subsidiary of the buyer.

For the seller, a stock sale can be advantageous as it allows for a clean break from the company and may offer beneficial capital gains tax treatment. However, from the buyer's perspective, a stock sale can be riskier than an asset sale because the buyer inherits all of the company's liabilities, including those that may not be apparent at the time of purchase.

Merger

Another common structure for selling a startup is through a merger. In a merger, the startup is combined with the buyer's company (or a subsidiary of the buyer). The buyer assumes all of the startup’s assets and liabilities and the startup ceases to exist as a separate entity. Mergers typically only require the consent of a majority of the startup’s stockholders, which can make them an appropriate structure when the startup has a lot of stockholders or when some stockholders do not want to sell.

Conclusion

Each of these structures has its own set of advantages and disadvantages, and the right choice depends on various factors including the nature of the startup's business, its assets and liabilities, tax considerations, and the strategic objectives of both the buyer and the seller. In any case, a successful sale requires careful planning and expert advice. Founders should work closely with their attorneys, accountants, and advisors to understand the legal, financial, and tax implications of each potential deal structure.