A Merger is a business transaction in which two or more companies come together to with only one company continuing in existence. A Statutory Merger is a business transaction which utilizes the form and format described in the applicable business law in the state(s) where the companies are domiciled (the home state).

An Acquisition is the “purchase” of a company by another company. The purchase consideration can be cash, equity, or a combination of cash and equity.

With proper structuring, a transaction may be accomplished as a tax-free reorganization under the Internal Revenue Code.

Whether a transaction is structured as a Merger or an Acquisition, the transaction is likely to be very complex with many, many issues that must be dealt with. Tax considerations are key in properly structuring the transaction.

Buyers can usually be separated into two groups, strategic buyers and financial buyers. A transaction with a strategic buyer must be negotiated differently than a transaction with a financial buyer since the purchaser’s desired result is different in each case.

Typically, strategic buyers are already involved in the same industry and are buying to add product or service lines to their existing business or new customers for their existing product or service lines, or both. There are usually economies of scale involved. Strategic buyers many times look for inefficiencies in a target company that, if favorably resolved, would result in significant increase to net income. This viewpoint is critical in negotiations since the buyer perceives that the core company is undervalued due to those inefficiencies. The thought is that once the target company is functioning efficiently, increased profits (and, therefore, higher valuation) will result. In the right circumstances, a transaction with a strategic buyer will result in the highest purchase price. Almost always with a strategic buyer, existing management receives a consulting agreement for one to three years but is no longer directly involved making managerial decisions for the company.

Financial buyers view a transaction very differently. Financial buyers are seeking a vehicle to put their money to good use and get good returns. Financial buyers are looking for a well-managed company that has achieved good results based upon regular and sustainable growth. Financial buyers want existing management to stay in place to continue their good work. Financial buyers almost always provide additional capital after the M&A transaction is complete for organic or acquisitive growth, or both. A very typical result in a transaction with a financial buyer is for existing management to purchase or maintain equity ownership in the new company. This can be a very profitable distinction for the target company management owners between a transaction with a financial buyer and a transaction with a strategic buyer, since a financial buyer typically has an investment horizon of three to five years. When the financial buyer sells the new company, the original owners achieve, what I call, a “double liquidity event”. The original buyer “sold” the company to the financial buyer for a fair purchase price in the first transaction and then participates in the second transaction when the financial buyer sells the new company after it has experienced substantial growth from both organic growth and acquisitions. Receiving twice the value of the original target company is very achievable.

If you are considering a transaction as a buyer or seller, I can assist you in developing and negotiating the right structure and financial terms that work best for all parties to the transaction.

I regularly work with many financial and several strategic buyers to help them find a business to “buy”, negotiate the transaction, prepare the required agreements, and work with the parties through closing. I also work strategically with business owners to determine the best buyer or partner, negotiate the transaction, prepare the required agreements, and work with the parties through closing. If you are a buyer, I can introduce you to the owners of profitable companies that are interested in pursuing a M&A transaction, and if you are a seller, I can introduce you to a financial buyer that is interested in your industry.

Whether you are a buyer or seller, you are welcome to contact me to confidentially discuss your situation.