Not Sure What Deal Structure to Use? A Top ETA Lawyer Weighs In

This Week in ETA:

Searchers: One of the biggest questions for self-funded searchers: to take outside investment, or not take investment? In this video, I break down some of the pros and cons. I know I’m biased, but having a community of investors can be a huge benefit when acquiring a business- especially when, as in the case of our fund, the majority of the investors are small business owners themselves, and can share hard-earned advice and expertise in addition to capital.

Investors: Debt Service Coverage Ratio (DSCR) doesn’t always tell the full story. Sean Smith had a great post on LinkedIn about how DSCR can be misleading if you have a business with high fixed costs. This is because a relatively small decrease in revenue could lead to a dramatic decrease in free cash flow, and put strain on debt payments far faster than you might expect. The Fixed Charge Coverage Ratio can be a more valuable metric to understand in businesses with meaningful fixed costs instead of relying just on DSCR.

Partner Perspective

Several times a month, I am going to begin “sharing the pen” with our top choice partners in the ETA world. This week, I am thrilled to introduce Eli Albrecht of Albrecht Law. Eli and his team have decades of experience at the world’s top law firms, which they apply to M&A deals, litigation suits, transactional tax cases, and fractional general counsel work. 

I have personally worked with Eli on deals I have invested in, and can attest to his expertise and effectiveness. He was also highly recommended to us by the search community when we asked for Deal Team recommendations earlier this year. If you need legal counsel during your search (and trust me, you do), I can’t recommend Albrecht Law enough.

Eli Albrecht: After supporting dozens of ETA and Independent Sponsor deals, I wrote around 50 articles to give searchers and sponsors the basic information on closing an M&A deal. I encourage you to check out each article, but today's article is discussing the threshold question of every Letter of Intent - what transaction structure should I use? If you have any questions or need legal support, please reach out.

Structure of Your Deal (Asset versus Stock):

1. What transaction structure you choose in your LOI will have significant economic consequences on your deal.

2. The three main structures are Asset Purchase, Stock/Equity Purchase, and Merger. 

3. If at all possible, a Buyer should always aim for an Asset Purchase in order to have a lower risk of old liabilities and to get a full step up on their tax basis after closing.

4. In some cases, a Stock/Equity purchase is necessary (because of licensing, contract assignment difficulties, or seller's tax position). In that case, sometimes it can still be structured as a "deemed asset sale" to give the buyer a basis step up (though a tax election 338(h)(10) or 336(e) or an f-reorg).

5. It is critical to have tax counsel review an LOI and get engaged in a deal early to determine the best structure. At Albrecht Law, our in-house tax Partner, Josh Siegel (JD/CPA), is involved in the deal from the first moment.

Featured Off-Market Deals

Brought to you by Deal Prospectors

Plus:

• My wife Julia and I were thrilled to be featured on Peter Lang’s Agency Acquisitions and Exits podcast, where we shared details from our search to acquire Lexigate. You can check out our episode on YouTube or Spotify.

• Check out these tips from SMBootcamp on how to position your deal well to investors and loan brokers.

Question:

Hit reply and tell us - What other legal questions do you have regarding your search? We’re happy to share with Eli for a future issue of TWIETA.