Due Diligence Deep Dive <<Pt.2>>

How to properly structure a software M&A transaction

Happy Friday Founders & Friends!

We have been receiving a great response to our last few weeks of newsletters. It seems that there is a ton of interest for a behind-the-scenes look into the world of software private equity! We love to hear that!

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How to properly structure a buyout; asset purchase v.s. stock purchase

In part 2 of the Due Diligence Deep Dive, we wanted to pull the curtain back on the structure of m&a buyouts and how we typically structure our deals at Bloom VP. Let’s get into it👇

When buying or selling a business the decision on how to structure the transaction is vitally important. There are two ways it can be laid out. Asset purchase or stock purchase.

Asset Purchase; What is it?

In an asset purchase, the buyer purchases certain agreed-upon assets and assumes certain agreed-upon liabilities of the company being acquired. This means that the buyer only takes on the risk of the agreed-upon assets. In regards to a software buyout, the target company’s Intellectual property (code, proprietary technology, trademarks, copyrighted assets, patents, etc.) are the most valuable assets!

In the case of an asset purchase, the asset purchase agreement (APA) is the holy grail! In case you are unsure of what exactly an APA is- it’s a legal agreement between a buyer and a seller that finalizes terms and conditions related to the purchase and sale of a company's assets. This document includes a description of the assets, price, payment terms, timings, and a lot more! It is important that both parties agree on the APA terms as it can directly impact the outcome of a deal for each party.

Pros & cons of an asset purchase

Pros:

  • tax benefit for the buyer (amortize goodwill etc.)

  • ability for the buyer to dictate what type of liabilities they want to assume

Cons:

  • contracts may have to be renegotiated

  • time-consuming to reassign each individual asset + negotiate APA

Stock Purchase; What is it?

The other deal structure that can be undertaken is a stock purchase. In a stock purchase, the buyer purchases the stock of the target from the target’s stockholders. This usually involves buying the company as a whole, which means taking on all of the assets, employees, liabilities, etc.

Pros & cons of a stock purchase

Pros:

  • straightforward as the entire entity is purchased

  • customer contracts are transferred

Cons:

  • buyers assume ownership of all assets and liabilities, including unwanted or risky ones

  • buyers don’t benefit from tax adjustments

Final thoughts

At Bloom, we structure our transactions in whichever way leads to the most attractive outcome for ourselves and the sellers. The specific structure is usually dependant on the dynamics of the target company (customer contracts, business model, etc.)

Most importantly it is critical to seek legal advice when considering the structure of a buyout as there are lots of differences and implications for each structure. If you are interested in learning more about stock v.s. asset purchases make sure to check out the following below 👇

📚  M&A Transaction Structures: The Difference Between an Asset Sale and a Stock Sale

📚 How to Decide between a Share Acquisition and an Asset Acquisition


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