A Visual Guide to the 5 Legal M&A Deal Structures 

All Business Sales Fall Under These Basic Structures

As a potential seller, you must understand that price or business valuation is not the only important part of negotiating with a potential buyer. Another critical issue is M&A deal structure. You should understand that all business sales can be structured in one of five ways:

1. A direct statutory merger of the target company into the acquiring company
2. A forward triangular merger of the target company into the newly formed acquisition subsidiary of the acquiring company
3. A reverse triangular merger of the acquiring company acquisition subsidiary into the target
4. The acquiring company purchases the shares or other ownership interests of the target company from the target company shareholders or members directly or through an acquisition subsidiary
5. The acquiring company purchases the assets from the target company

Each of these five methods of acquisition is illustrated below.

Direct Statutory Merger

A direct statutory merger is common. The acquiring company acquires all of the target company’s assets and liabilities. The target company then operates under the surviving company’s name and is considered liquidated. All shareholders of the target company are either compensated for their shares or hold shares in the surviving company.

Forward Triangular Merger

In a forward triangular merger, also known as an indirect merger, the target company merges into a subsidiary of the acquiring company. This M&A deal structure normally takes place when the merger combines both cash and stock. Because the target company is merging into a subsidiary, rather than directly into the acquiring company, the acquiring company is protected from the target’s liabilities.

With regard to shareholders, the acquisition subsidiary compensates the target’s shareholders with stock, but up to 50% of their compensation can be in the form of cash and other non-stock options.

Reverse Triangular Merger

The common reverse triangular merger, like a forward triangular merger, also shelters the acquiring company from the target’s liabilities because it is not a direct merger. However, the acquisition subsidiary, in this case, is not the surviving company. Instead, it purchases the target company and merges into it as a wholly owned subsidiary of the acquiring company. The buyer’s stock or cash is issued to the target company’s shareholders.

Why is this such a popular M&A deal structure? It’s because the surviving target company is preserved, so it keeps its business contracts and does not have to transfer its assets to the acquiring company, which may not be possible otherwise with anti-assignment clauses. This allows the acquiring company to have access and control of the target’s business contracts, preserving the target’s business continuity.

Acquiring Company Purchases Shares of Target Company

A share sale is more straightforward than a merger. In a share sale, the acquiring company purchases the target company’s stock from its shareholders. Rather than merging companies and dealing with complex contract reassignments, the target company gets to retain its name and business contracts, but under a new owner.

Acquiring Company Purchases Assets from Target Company

An asset sale does not deal with the target company’s shareholders. Instead, the acquiring company chooses specific assets (and sometimes assumes liabilities) that it wants to purchase and finds valuable. The target company remains in operation and does not have to merge or liquidate.

Which M&A Deal Structure Should You Choose?

As can be seen by reviewing the charts of each M&A deal structure, there are four methods to purchase the shares in a company and one way to purchase the assets of a company.

The four share purchase methods include the three merger varieties plus the purchase of the shares of the target company from its shareholders. In contrast, there is only one acquisition method by which the acquiring company purchases the assets of the target company shown in the above diagrams.

Therefore, the question presented to you, the seller (as well as any buyer), is whether the four share acquisition methods should be employed or whether the asset acquisition method should be employed to effectuate the sale of the company’s business.

Each deal structure comes with its own tax advantages (or disadvantages), business continuity implications and legal requirements. All of these factors should be considered when choosing the best deal structure for your business.

We think you’ll also like:

1. When Does an Asset Acquisition Become a De Facto Merger?
2. Purchase Agreements, Positive Covenants, and Restrictive Covenants in M&A Transactions 
3. When Should a Seller Sign a Letter of Intent? 

[Editors’ Note: Thank you to additional contributing author, Tom Petrides, for his input. To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Selling a Business 101
2. The M&A Process 
3. Valuation: What’s It Worth? Valuing a Business for Sale

This is an updated version of an article originally published on April 3, 2015, and revised on November 1, 2019.]

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