Deal structure options include:
- Stock purchase. The buyer purchases the target company’s stock from its stockholders. The target company remains intact, but with new ownership.
- Asset sale/purchase. The buyer purchases only assets and assumes liabilities (such as payables) that are specifically indicated in the purchase agreement.
- Merger. Two companies combine to form one legal entity, and the target company’s stockholders receive cash and/or buyer company stock.
Escrows and Earn-Outs
An “escrow” account is a special account set up by attorneys to hold transaction funds until the date that the transaction actually closes. (If the term sounds familiar, it may be because you probably worked with an escrow account if you’ve ever bought or sold a house.) It generally protects the buyer company in the event there are breaches of contract by the target company.
Earn-out is a pricing structure in which the target company must "earn" part of the purchase price based on achieving certain business performance goals after the acquisition. This part of the purchase price is paid by the target company after closing.Read More
Representations and Warranties
“Representations and warranties” are just another way of saying that, in advance of the transaction, the two companies must share vital information about the transaction and about themselves, such as their financial and legal standing. The buyer company typically wants the target company to agree to provide detailed information on issues such as:
- Intellectual property
- Financial statements
- Compliance with law
- Material contracts
Non-Compete and Non-Solicit Clauses
These clauses prohibit both the buyer and target companies from:
- Engaging in a business activity that is competitive with either company’s business activities (non-compete).
- Trying to lure/hire away each other’s customers or employees (non-solicit).