Factors to consider when choosing an M&A transaction structure

In the field of corporate Mergers and Acquisitions (M&A), the choice of transaction structure is an important factor that determines the approach and detailed implementation plans of the seller or buyer. This structure not only covers how the transaction is organized but also clarifies important times, payment processes and terms, legal framework…

The process of choosing the appropriate transaction structure requires a deep understanding of many fields, including finance, corporate governance, legal, and tax. The following article PLF will analyze factors to consider when choosing an M&A transaction structure.

1. Identify goals in M&A transaction

Identifying the goals in an M&A transaction is one of the most important tasks that the seller and buyer need to clarify. Before entering the M&A process, the buyer needs to determine a clear strategy and goals for what they want to achieve in the deal. Its purpose is to assist the buyer in developing a detailed plan and smaller goals based on what must be achieved in the transaction. Furthermore, it also helps the buyer initially determine the expected transaction structure implemented.

For example, if the main objective of the acquisition is to reach a new market or expand the product portfolio, then a strategic partnership or joint venture may be more suitable via a share purchase structure. On the other hand, if the focus is on achieving operational efficiency and reducing costs, an acquisition or outright merger may be preferred.

2. Evaluate and prepare before the transaction

Evaluating and implementing pre-transaction preparation steps is one of the prerequisite steps for the parties to proceed to the next stages. At these steps, the parties will usually perform the following tasks:

• Evaluate the finances and operations of the target company: Analyze financial statements, operating performance, markets and other related factors.
• Due Diligence: Carefully review all financial, legal, tax, operational, and human resources aspects and even marketing strategies and plans of the target company.
• Adjust goals and plans: add or modify original goals and plans to suit the current situation.

3. Identify and optimize the buyer’s financial conditions

One of the main factors to evaluate when choosing a transaction structure is determining the financial conditions of the buyer. This includes valuing the target company, determining the purchase price and assessing the financial impact on the seller. In other words, the buyer and seller in the transaction must consider and evaluate the following factors:

• Transaction value (price): Determine the transaction value and negotiate a price with the other party in the transaction.
• Payment structure and process: Decide on the payment method, including cash, shares (capital contribution), or a combination of both.
• Price adjustment terms: Includes terms such as capital, margin, and working capital adjustments to adjust transaction value based on prerequisite conditions.

4. Evaluate tax factors

The next important factor to consider is that the tax implications associated with different transaction structures will be regulated differently. It is essential to consult with tax advisors and legal advisors to understand how these transaction structures may impact the tax situations of both parties. For example, the asset acquisition method may allow the buyer to benefit from a tax deduction on the assets purchased, while the share purchase method (capital contribution) may provide other tax benefits from existing incentives.

5. Evaluate legal factors

Compliance with legal requirements and regulations is a mandatory condition in any M&A transaction. Depending on the industry, jurisdiction and actual circumstances, different transaction structures may have different legal and regulatory implications. For example, in highly regulated sectors such as healthcare, medicine, or finance, certain transaction structures may require local regulatory approval, which can significantly affect the progress and feasibility of the transaction.
In addition, risk allocation also needs to be carefully evaluated when choosing a transaction structure. Accordingly, identifying potential risks will help determine how to limit and allocate these risks between parties appropriately. For example, in the income structure, part of the purchase price will depend on the target company achieving certain business performance milestones, thereby reducing risks for the buyer.

It should also be noted:

Although the parties, especially the buyer, have shaped the preliminary transaction structure in the M&A deal from the start. However, after receiving the appraisal results, the parties may change the transaction structure to better suit the target company’s situation. Besides, each transaction structure has its meaning, it may be unsuitable for this transaction but will be appropriate for another. Furthermore, the pros and cons of each type of transaction structure depend on the needs and goals of the buyer and seller.

Conclusion:

Choosing the appropriate transaction structure is a complex decision that requires the parties to the transaction to carefully evaluate many different factors. By considering financial impacts, tax considerations, legal requirements, and risk allocation plans, the parties will be able to choose a transaction method that suits their goals and at the same time maximize the chance of success in M&A transactions.

At PLF Law Firm

In today’s dynamic M&A market, choosing the right structure is critical for success. PLF Law Firm is your trusted M&A advisor, we offer “Mergers and Acquisitions” services from Restructuring, Due Diligence, Banking & Finance, and Deal Execution to help businesses navigate the complexities of mergers and acquisitions, buy-sell agreements, and other transactions. Our experienced lawyers bring a deep understanding of the current M&A landscape, enabling us to provide tailored solutions that align with your specific goals. Contact PLF to discuss your M&A needs.

Contact PLF Law Firm today via email at inquiry@plf.vn or +84913 902 906 or Zalo | Viber | WhatsApp to receive a free 30-Initial Minute Consultation.