🏢Mastering M&A Deal Structuring

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At Hughes Commercial, we deliver actionable insights and strategies at the intersection of commercial real estate (CRE), business brokerage, and mergers & acquisitions (M&A). Each edition unpacks market trends, investment strategies, and deal-making opportunities to help you navigate CRE assets, business transactions, and portfolio growth.

Whether you're exploring income-producing properties or negotiating business deals, our goal is to equip you with the tools to seize opportunities and build lasting success.

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Featured Article

Structuring a merger or acquisition (M&A) deal is as much an art as it is a science. Buyers and sellers alike must navigate complex agreements that impact risk, taxes, and the ultimate value of the transaction. Two pivotal aspects of deal structuring include choosing between asset purchase vs. stock purchase agreements and leveraging earnouts to bridge valuation gaps.

In this edition, we break down these concepts to help you make informed decisions in your M&A ventures.

Asset Purchase vs. Stock Purchase Agreements

When acquiring a business, the transaction is typically structured as either an asset purchase or a stock purchase, each with distinct implications.

1. Asset Purchase Agreement

• What It Is: The buyer acquires specific assets and liabilities, rather than the entire entity.

• Advantages for Buyers:

  • Greater control over which assets and liabilities to assume.

  • Potential tax benefits through depreciation and amortization of purchased assets.

• Challenges for Sellers:

  • Double taxation for C-corporations if proceeds are distributed as dividends.

  • Potential retention of unwanted liabilities.

2. Stock Purchase Agreement

• What It Is: The buyer acquires the company’s stock, effectively taking ownership of the entire business entity.

• Advantages for Sellers:

  • Simpler transaction with fewer tax complications.

  • All liabilities are transferred to the buyer.

• Challenges for Buyers:

  • Higher exposure to pre-existing liabilities.

  • Limited ability to step up the tax basis of assets.

Key Consideration: The choice between these structures often depends on tax strategies, liability concerns, and the nature of the business being acquired.

Earnouts: Bridging Valuation Gaps

In some deals, the buyer and seller may disagree on the business’s valuation, especially if the future performance of the company is uncertain. Earnouts can bridge this gap effectively.

What is an Earnout?
An earnout is a contractual provision where part of the purchase price is contingent on the business achieving specific performance targets post-closing.

Advantages of Earnouts:

• For Buyers: Reduces upfront risk by tying payment to actual performance.

• For Sellers: Provides a pathway to capture additional value if future performance exceeds expectations.

Challenges of Earnouts:

• Disputes Over Metrics: Defining and measuring performance targets can lead to post-transaction conflicts.

• Operational Influence: Sellers may worry about the buyer’s management decisions affecting performance.

Best Practices for Earnouts:

1. Clearly define performance metrics (e.g., revenue, EBITDA).

2. Specify timelines and payment schedules.

3. Establish transparent reporting and governance procedures.

Key Takeaways

• Deal Structure Matters: Choosing between an asset purchase and a stock purchase impacts taxes, liabilities, and the complexity of the transaction.

• Earnouts Require Clarity: When using earnouts, ensure that terms are precisely defined to avoid future disputes.

• Both tools are vital in navigating M&A deals and aligning the interests of buyers and sellers.

Need Guidance on Structuring Your Next M&A Deal?

At Hughes Commercial, we specialize in helping clients navigate the complexities of M&A transactions, from deal structuring to negotiation and closing.

📩 Contact us today to discuss your M&A goals and strategies.

Best regards,

Hughes Commercial

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Best regards,

Hughes Commercial Team