A Startup Founder’s Guide to M&A Deal

Structure & Agreement

Source: Eqvista

A merger is when two companies join together to form a new company. An acquisition is when one company takes
over another. When either a merger or acquisition happens, an M&A deal structure is created, and all the terms are
set in an agreement.

USES OF NON-BINDING OFFER IN AN M&A AGREEMENT

With an M&A agreement comes a non-binding offer. The non-binding offer, also called the indicative offer, lists all the
terms and conditions of a potential buyer in an M&A transaction. It is a simple written offer letter that is signed by
authorized staff of those in the deal.

The non-binding offer is not a legally binding one. Therefore, the seller cannot rely on the terms in it. This is used in
transactions to get a first glimpse of the way the parties value the business and what terms and conditions they will
have in the offer. Only the purchase agreements are the ones that allow the parties to buy and sell. The seller uses
the information on the non-binding offer to analyze, compare and review the bids. It is used as a draft to help with the
M&A deal.

DIFFERENT WAYS OF STRUCTURING AN M&A AGREEMENT

There are three ways in preparing an M&A deal structure. In fact, a lot of companies have begun to use more flexible
and creative deal structuring methods.
1. ASSET ACQUISITION
The buyer buys all the assets of the selling company. This method is considered the best deal structure used to sell a
company if the buyer wants to get cash in exchange for the deal. With this, the buyer also chooses the assets that
they wish to purchase.

Advantages of this method:

● The selling company will still continue to operate as a corporate entity even after the sale has been made,
with its unsold liabilities and assets.
● The buyer has the choice to choose the assets they get to buy from the seller and which ones they do not
want to purchase.

Disadvantages of this method:

● The deal might take a long time to close as compared to the other M&A deal structure methods.
● This process can lead to high-impact tax costs for both parties.
● The buyer will not have the choice to acquire any non-transferable assets, such as goodwill.

2. STOCK PURCHASE
The stock purchase method does not have the assets transacted directly. The major amount of the voting stock of the
seller is acquired by the buyer. This means that the control of the seller’s assets and liabilities is transferred to the
buyer.

Advantages of this method:

● It is a less expensive method.
● Closing this deal will take less time as it is simpler and requires less negotiations.
● The taxes on this deal are low, especially for the seller.

Disadvantages of this method:

● Uncooperative minority shareholders might have an issue with this.
● Financial and legal liabilities can come with the stock purchase acquisition.
3. MERGER
A merger is a result of an agreement between two companies that want to come together and create a new company.
This process is normally less complicated compared to the other two. It's why this method is mostly used.

MERGERS AND ACQUISITIONS AGREEMENTS

The agreement sets the rules that the newly acquired company needs to follow until the convergence has been
finalized. It also includes the accounting of all the assets and liabilities of both companies and contains the details of
how each company’s shares will be valued post the merger.

The merger and acquisition agreement holds many documents that are important to finalize the transfer. One such
document is also the share purchase agreement for the mergers and acquisitions process.

An M&A deal structure is a binding agreement that outlines the rights and obligations of both parties. It states what
each party gets and what each is obligated to do as per the agreement. Also called the terms and conditions of the
merger and acquisition.

The deal structure is prepared by considering the risk weightage of both parties. It needs both parties to state the
following things:

● How much risk can they take

● Observable latent risks and how they can be managed
● Their stance on the negotiation
● Conditions under which the negotiations can be canceled

THE PURCHASE AGREEMENT

This agreement transfers the individual assets from the seller to the buyer by signing a bill of sale. The first step is to
select the acquisition method of how the buyer is purchasing the company. Is it going to be an entity purchase or an
asset one? An entity purchase means a majority of the company’s stock, along with the debts and obligations, will go
to the new owner. With an asset purchase, the buyer will get all the assets – all the real property like real estate,
office equipment, and even intellectual property, including copyrights, trademarks, and patents. The new buyer has
the right to start depreciating the new assets instantly as it gives a tax benefit.

STEPS FOR M&A AGREEMENT

An M&A deal structure usually aims for a win-win situation. The interests of both parties should be considered when
making the deal and reduce the risks as much as possible. These are the two main documents founders need to know:

1. Term Sheet – states the terms and conditions of the mergers and acquisitions’ financial investment. These are
normally considered to be legally binding unless both parties have stated it.

2. Letter of Intent (LOI) – outlines the understanding between the parties and their intent in a legally binding
agreement. It is not normally considered a legally binding document, except for the binding provisions that have been
added to it.