Foundry Law Group Blog

Three questions to resolve before you enter a potential acquisition

One of my favorite parts about being an attorney at Foundry is the firm’s acquisition practice. Whether we are representing the buyer or seller, acquisitions are an exciting, pivotal moment for our clients. However, acquisitions are also stressful for clients: a lot of money is involved and the “what if” and “what about” considerations are endless.

This blog touches on three questions to ask yourself and think about during the early stages of a potential acquisition, prior to hiring an attorney:     

  • How is the transaction going to be structured?
  • How is payment of the purchase price going to be structured?
  • Is the transaction reliant on third parties? 

If you’re curious when to hire an attorney during a potential acquisition, Madhu Singh wrote a great blog on that topic.

How is the transaction going to be structured? 

The two most common structures used when purchasing or selling a company are asset purchases and stock purchases. As the names imply, “asset purchases” are when the buyer purchases business assets directly from the seller (the company); “stock purchases” are when the shareholder(s) of the company (the seller) transfer 100% of the company’s stock to the buyer in exchange for the purchase price. 

Both asset purchases and stock purchases have their pros and cons. For example, asset purchases allow the buyer to limit liability to only those assumed in the asset purchase agreement (i.e., assuming a specific loan but not the company’s credit card or other debt); this, versus stock purchases where the buyer assumes all the liabilities of the company it acquired. However, asset purchases are generally more complex due to having to first identify and then transfer or assign the purchased assets to the buyer; this, versus stock purchases where it’s relatively straightforward for the seller’s shareholder(s) to transfer stock to the buyer.

Both asset purchases and stock purchases also have unique tax implications. The tax implications are dependent on the parties’ entity structure, the specific assets or property (if any) involved in the transaction (real estate, for example, is generally subject to excise tax), as well as how payment of the purchase price is structured. Therefore, it’s important to consult your CPA throughout the acquisition process. 

How is payment of the purchase price going to be structured? 

In an ideal world, every acquisition would proceed as follows: the parties agree on the purchase price, seller wants cash, buyer has the cash and, at closing, buyer hands seller a briefcase full of cash (or more realistically, initiates a wire transfer) for the full purchase price. However, sometimes the buyer does not have enough cash, the parties do not agree on a final purchase price or, if they do agree, it often makes more sense for the buyer to pay the seller at a later date. 

When cash is not used to pay the purchase price in full at closing, some structure where the buyer postpones payment, either in full or in part, is common. One structure is “seller financing” where the seller “loans” the buyer either all or a portion of the purchase price in form of a promissory note – a legally binding IOU. The buyer then makes payments to the seller until the promissory note plus any interest is paid back in full. Another variation is called “earnout payments” where the buyer agrees to pay the seller a portion of the purchase price with the remainder contingent upon future metrics or events. This typically occurs when buyer and seller do not agree on the purchase price for specific reasons. (Such as buyer and seller disagreeing on the value of seller’s new, unreleased product.)

These are just two examples; there are a laundry list of creative ways other to structure payment, such as structuring payments in form of an installment purchase agreement or buyer using its stock akin to cash – just to name a few.  As with everything, what option is best and how to specifically structure the terms will be unique to your situation. 

Is the transaction reliant on third parties? 

Third parties play a significant role in acquisitions but are often overlooked. A seller is likely a party to numerous contracts with third parties that play an integral role in the acquisition. This includes mortgagees, landlords, suppliers, clients, or customers. In addition, most of these contracts will likely contain a provision that prevents a seller from assigning the contract to a new entity or new ownership without the express consent of the third party. Depending on the situation, a third party’s failure to consent could significantly impact an acquisition. An example may illustrate the point:

Seller is a successful bakery. For the past twenty (20) years, Seller has leased a large building that acts as the bakery and brick and mortar. Seller also has a long-term agreement with a supplier for the specific flour it uses (a proprietary gluten-free blend). Seller also has agreements with twenty (20) restaurants and ten (10) grocery stores for its baked goods. 

In this simple example, there are likely contracts in place between Seller and the landlord, vendor, all the restaurants, and all the grocery stores. Each contract will also likely have language that requires each third-party’s consent prior to assignment. If one or two restaurants do not consent, then that may not significantly impact the deal; however, if either the landlord or supplier do not consent, that will likely impact the deal.  

Third parties will be discovered during due diligence. However, thinking about the third parties involved and the role they play in the acquisition prior to due diligence will save you both time and money. 


Questions? Foundry Law Group is here to help!

Foundry Law Group has significant experience helping businesses, startups, and entrepreneurs with buying and selling businesses. We offer flat-fee acquisition packages tailored to your unique needs. If you’re moving forward with a potential acquisition, give us a call. We’re here to help. 


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