Acquisition is the goal of many Silicon Valley startups. Whether you’re selling to another owner, dispersing your assets, or merging with an industry leader, there are three main types of private acquisition structures: merger, asset acquisition, and stock acquisition. There are benefits and fallbacks to each type of acquisition, and you should work with Silicon Valley mergers and acquisitions attorney at Structure Law Group, LLP to discuss your options.
Primary Private Acquisition Considerations
While there are many unique factors to consider before selecting an acquisition structure, corporate attorneys generally recommend you emphasize the following:
- Tax benefits and consequences,
- Current ownership structure,
- Market & Commercial considerations, and
- Ownership intent.
Structuring an acquisition as a tax-free reorganization as opposed to a taxable sale may benefit the seller, while a buyer may benefit from asset acquisition whereby the seller retains tax liability. Balancing the interests of the buyer and seller is key to a successful and cost-effective acquisition.
A business merger is generally defined as “the absorption of one corporation into another” whereby one company acquires all the assets and liabilities of another. There are both direct and indirect mergers. A direct merger involves two parties, the acquirer (buyer) and the target company (seller). In a direct merger, the acquirer purchases the target company, which is fully absorbed into acquirer’s corporation. For example, Corporation A acquires Corporation B, and both corporations are now Corporation A. An indirect merger may benefit the buyer, as it involves three parties, one of which shields the buyer from certain seller liabilities. In an indirect merger, the buyer creates a wholly owned subsidiary, and the subsidiary directly mergers with the target company. The target company essentially becomes a wholly owned subsidiary of the buyer, but in either case, the identity of the target company is extinguished.
In an asset acquisition, a buyer only purchases certain target assets, such as a division or subsidiary of the target company. For example, a buyer may wish to purchase all business linked to a single patent while leaving the target corporation intact. The buyer benefits from an asset acquisition because:
- It can choose its assets and liabilities,
- It’s lower risk than a merger, and
- It has more tax benefits for the acquiring corporation.
Sellers may benefit from an asset acquisition by retaining their identities and ownership structures, but they are subject to income taxation on purchased assets.
Anticipated problems with dissenting owners may result in stock only acquisition. In this case, the buyer purchases the majority stake in the target company directly from the shareholders, giving it control of all the target company’s assets and liabilities. The target company becomes a subsidiary of the buyer that may or may not be wholly owned, as the target company maintains its identity. Unlike with a merger, the target company is not always dissolved. It maintains its identify unless it’s merged with the acquired company after the initial stock acquisition.
Hire an Experienced Silicon Valley Mergers and Acquisitions Attorney Today
Every acquisition is unique, and your company may benefit from considering multiple options. To schedule your startup acquisition consultation, call our Silicon Valley corporate attorneys at Structure Law Group, LLP at 408-441-7500 or contact us online.