Selling a business is always a challenge. One of the most important aspects is the chosen deal structure. The three most common options for small businesses are an asset purchase, a stock purchase, and a merger. They each have their advantages and disadvantages, and most business owners benefit from working with a professional mergers and acquisitions company in the months leading up to the sale of their company.
What Are the Most Common Deal Structures for Selling a Business?
Small business owners have three options when selling their company. They can choose an asset purchase, a stock purchase, or a merger. The asset purchase is the most common deal structure, but it’s worth considering the other options because they are sometimes better for the seller.
An Asset Purchase
During an asset purchase, the buyer purchases certain items directly from the business owner. They can be tangible assets like inventory, equipment, or receivables, but also intellectual property. Some buyers prefer this structure because they aren’t taking on the target company’s liabilities, and they aren’t obligated to purchase all the company’s assets.
However, an asset purchase can be challenging because all the contracts with customers and suppliers aren’t necessarily acquired by the buyer. This means that they may have to be renegotiated, which takes a lot of time and effort. It’s also worth considering that going through each asset separately is time-consuming. An asset purchase is therefore an expensive way to sell a company.
A Stock Purchase
As the name suggests, a stock purchase involves buying the stock of a company. This method is common for publicly-traded companies and for smaller businesses. For the seller, a stock purchase is sometimes better because the buyer doesn’t get to select which assets they want to buy. Instead, they are taking over a certain percentage or the entirety of the business’s assets, liabilities, and contracts.
Stock purchases can also come with some tax advantages for the seller because the price is taxed at the capital gains rate, not the income rate. The complexity of a stock purchase depends on the number of shareholders a company has. Generally, it is an efficient way of transferring ownership of a business if there are few people involved.
Mergers are common among big companies, but they aren’t very popular among small businesses. Despite this, they can be advantageous under certain conditions. They involve merging two companies and forming one larger corporate entity. The seller typically receives stock, money, or both, while the buyer receives assets.
Typically, mergers are quicker than traditional sales, so they are great for people who are in a rush to sell or buy. Some buyers are wary of them because they are worried about undeclared liabilities. It can be easier to hide issues during a merger due to the speed of the sale.
Working with a company like ASA Ventures Group prevents problems and increases the level of trust between buyers and sellers.
Which Deal Structure Is Best for My Company?
If you’re not sure which deal structure to choose, reach out to us. We will analyze your company and let you know what your options are, then come up with a suitable plan. The best deal structure depends on the buyer’s intentions as well as your goals. It’s almost always best to discuss your ideas with the buyer at the start of negotiations. That way, they can create a Letter of Intent to purchase your business. This LOI then forms the basis of your negotiations.
At ASA Ventures Group, we encourage buyers and sellers to discuss their intentions, expectations, deadlines, and what they are and aren’t willing to compromise on.
How Do I Know I’m Getting Enough Money for My Company?
As part of our service, we discuss your business’s assets, liabilities, and future potential in detail. With your input, we put together valuation expectations you might expect in the current market. These might include the price of each asset, but also the terms of your sale. That way, you don’t have to worry about selling your company for less or being forced into a deal structure that isn’t right for you.
Mitigating Your Risk
Selling a business feels risky. You might have built up your company and run it successfully for several decades. The last thing you want is to lose a lot of money on a bad deal. For this reason, we always speak about risk mitigation strategies when we first start working with a new seller. Properly vetting the buyer is the most important factor because it reduces the chance of an unfavorable deal.
If the buyer isn’t willing to pay the full amount upfront, we sometimes suggest holding some assets in escrow until the transaction is complete. We always ask potential buyers to sign non-disclosure agreements to protect the company’s intellectual property.
Properly Vetting the Buyer
Before starting negotiations, you have to vet the buyer. A good vetting process prevents you from spending several months putting together a deal, only to find out that your buyer was never serious about acquiring your company. Unless you’ve bought or sold several businesses in the past, you might not know how to properly vet a buyer. That’s where we come in.
We start by checking the buyer’s identity and details to make sure they aren’t misrepresenting themselves. Then, we analyze their background and financial situation to check they have enough capital to acquire your company. We also look at their experience in your industry and the success of companies they have worked with in the past.
Mitigating Confidentiality Risks
During the negotiation process, you share sensitive information with potential buyers. If they leak this data to the public or your competitors, the viability of your business is impacted. That’s why we ask interested parties to sign a nondisclosure agreement before allowing them to access information about your company.
Then, we grant them access to the Confidential Information Memorandum and data room, where they can go through your business’s data and forecasts. We highlight important facts, so buyers can easily see why your company is unique and a great opportunity.
An Earn-Out Structure
Sometimes, buyers don’t want to pay upfront for the entire business. Instead, they prefer to make a down payment, take control of the company, and then slowly pay off their debt using the profits from the business. This is an excellent strategy for the buyer, but it isn’t ideal for the seller.
While occasionally earn-outs do happen in our transactions, cash upfront is the best deal for the seller. We always push for maximum cash upfront.
There are three basic deal structures: the asset purchase, the stock purchase, and the merger. They all offer unique advantages to company owners. If you’re thinking of selling a business, reach out to us. Call us at ASA Ventures Group and book your initial consultation. We’ll discuss your company’s assets, liabilities, and forecasts to come up with an appropriate solution.