When a company considers acquiring another company or being acquired, the structure of such acquisition can vary, with potentially significant results. The two most common structures used in the sale/acquisition of startup companies are an asset purchase and a merger. The following is a high-level overview of each of these structures, and some pros and cons for companies to consider when deciding between the two.
An asset purchase involves a buyer acquiring some or all of a target company’s assets in exchange for consideration, which can be cash, equity, or a combination of both. If the asset purchase is for all of the target’s assets, after the purchase the target company dissolves and distributes its remaining assets to its equity holders. A few pros and cons for companies to consider regarding asset purchases:
- Buyer can choose which assets to purchase and can avoid assuming certain assets (and liabilities)
- An asset purchase does not typically require state filings to complete the transaction
- Buyer typically receives a step-up in basis of the assets purchased for tax purposes
- More complicated/expensive to complete
- Usually requires consents from counterparties to assign all of the target’s contracts and licenses to the buyer
- Buyer would need to re-hire any target employees that it intends to keep
A merger is a process governed by state corporate law in which one entity merges with and into another entity with only one entity surviving. The consideration for a merger can be cash, equity, or a combination of both. A few pros and cons for companies to consider regarding a merger:
- A merger can be less complicated/expensive to complete
- Likely no need to obtain consents from counterparties to assign all of target’s contracts and licenses
- If desired, a merger may be structured such that the employees of the entity that does not survive can simply continue working for the surviving entity
- State filings are required for the merger to be effectuated, which requires time and money
- Buyer acquires all of the liabilities of the target
- Buyer typically does not receives a step-up in basis of the assets purchased for tax purposes
Ultimately, deciding whether an asset purchase or merger is the right fit for an acquisition will depend on the specific facts of such acquisition. However, the above pros and cons provide a general starting point to guide a company’s analysis.