Keen to structure a deal? Do it right and you’ll be ensuring its success. Go about things the wrong way, though, and an otherwise enticing deal could turn into an expensive mistake.
Whether you're considering a merger, acquisition, or other business transaction, the deal structure will impact the financial and operational outcomes for both parties - and because no business owner wants to face any costly setbacks, here’s the guide you need to read now.
The structure of a deal is not just a formality, it’s a critical factor that influences every aspect of the transaction. This includes:
A successful deal structure addresses the specific goals of both the buyer and the seller. It also balances the interests of all parties, and maximises value while minimising unnecessary risk.
In addition, the right structure ensures tax efficiency, helps with financing decisions, and sets the stage for smooth post-transaction integration.
So, you see, it really does make sense to work with a team of experts when it comes to structuring deals.
One of the first decisions to make when structuring a deal is whether to proceed with an asset purchase or a share purchase. It’s worth noting that each approach has distinct advantages, depending on the circumstances of the transaction:
Asset Purchase: In an asset purchase, the buyer acquires only specific assets of the target business, such as intellectual property, property, inventory, and equipment, while leaving behind liabilities like debts or legal claims. This structure is often preferred when there are concerns about the target's financial health, its liabilities, or regulatory issues. It can, however, prove more complex in terms of transferring assets and this may mean the renegotiation of contracts.
Advantages:
Share Purchase: In a share purchase, the buyer acquires the entire company, including all assets and liabilities.
This structure is often simpler from a legal standpoint and is typically preferred when the buyer wants to maintain business continuity, retain key employees, or access the target company’s existing contracts and relationships.
Advantages:
The way payments are structured in a deal can affect both the immediate financial impact and the long-term outcomes. There are two main payment structures to consider:
Upfront Payment: An upfront payment offers the seller immediate liquidity and certainty but may not always reflect the true value of the business. This is especially true if future performance is uncertain. From the buyer’s perspective, this approach may come with higher risk if the target’s performance falls short of expectations.
Deferred Payments (Earnouts): Deferred payments, or earnouts, allow the buyer to link part of the purchase price to the future performance of the business. This can be an effective way to share both risk and reward. Earnouts are particularly useful when there are uncertainties around the target’s future performance, or when the seller’s expertise and leadership are crucial to the success of the business post-transaction.
Advantages:
The structure of a deal has significant implications for both parties' tax obligations. A well-structured deal can minimise tax liabilities, enhance cash flow, and preserve value.
Capital Gains vs. Income Tax: Depending on whether the deal is structured as an asset or share purchase, the seller may face different tax treatments. For example, a share sale may qualify for capital gains tax treatment, which generally offers more favourable tax rates.
Tax Reliefs: The deal structure should also consider any available tax reliefs, such as Business Asset Disposal Relief (BADR) or R&D tax credits, which could enhance the financial outcomes for both parties. Tax considerations such as VAT, stamp duty, and inheritance tax must also be factored in during the structuring process to avoid unexpected liabilities.
International Tax Considerations: In cross-border transactions, additional complexities arise, such as dealing with tax treaties, withholding taxes, and transfer pricing rules. Structuring the deal to minimise international tax liabilities requires expert advice and careful planning.
The way the deal is financed—whether through debt, equity, or a mix of both—will have a direct impact on the transaction’s structure. Financing decisions should align with the buyer’s long-term strategy, risk tolerance, and available capital.
Debt Financing: In a debt-financed transaction, the buyer borrows money to fund the purchase, which may involve taking on additional debt obligations. While debt financing offers the advantage of retaining full ownership, it also carries the risk of interest payments and potential default if cash flow issues arise post-acquisition.
Advantages:
Equity Financing: Equity financing involves raising capital by issuing shares or taking on investors. While this may dilute ownership, it can be less risky than debt financing, as there are no mandatory repayments. This structure is often preferred for deals where future cash flow is uncertain or if the buyer wishes to share the risk with other investors.
Advantages:
Every deal structure must adhere to applicable laws and regulations, which may include antitrust regulations, competition laws, and employment law. Failure to comply with regulatory requirements can lead to costly delays.
Regulatory Approvals
Deals may require approval from regulatory bodies, such as the Competition and Markets Authority (CMA) in the UK. Structuring the deal with these requirements in mind can prevent unnecessary delays.
Employment Law: Consideration must be given to the treatment of employees post-transaction, including any employee benefits, pensions, and contractual obligations.
At Arnold Hill & Co, we understand that structuring a deal is not a one-size-fits-all approach. Our Corporate Finance and Tax teams work collaboratively with our trusted partners to design a deal structure that aligns with your strategic objectives while addressing all relevant financial, tax, and legal considerations.
Our Corporate Finance professionals help you navigate the complexities of deal structuring, from determining the optimal transaction type, negotiating terms, or ensuring that financing decisions align with your goals.
Asha Moore, Corporate Finance Associate at Arnold Hill & Co, says: "A poorly structured deal can turn a promising deal into a costly mistake. From financial risks to legal pitfalls, every detail matters. By seeking expert guidance, you ensure a seamless transition, maximise value, and avoid hidden liabilities—setting your business up for long-term success."
Meanwhile, our tax specialists provide advice on how to structure the deal to minimise tax liabilities, considering every aspect of the transaction, from capital gains to VAT and international tax issues.
We combine the expertise of our Corporate Finance and Tax teams to provide you with a structured, strategic approach that ensures your deal is set up for success.
Contact Asha today to schedule a consultation and learn how our Corporate Finance and Tax teams can help you maximise value, minimise risk, and set your business up for long-term success.
Author, Asha Moore - Corporate Finance Associate