Louis Lehot: Ready To Sell Your Startup In 2021?

Palo Alto CA

18 March, 2021

4:03 AM

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By: Louis Lehot What is a merger, reverse-merger, acquisition, stock purchase or asset sale? Picking the right transaction structure can make or break your return. There will always be a variety of reasons driving if and when to sell your business. On the one hand, things may not be going as well as you thought, and it’s time to consider options. On the flip side, there are inflection points when things are going exceptionally well, and opportunities to achieve liquidity present themselves. It is a great position to be in, but it’s also when founders are most hopeful for the future and least interested in selling. Perhaps something happened outside of the company that makes selling an attractive option, or you’ve taken the company as far as you can, and you’ve concluded that it is time. Usually, the decision is based on a combination of these reasons. Just as you needed a plan to start your business, you’ll need a plan to get out of it. Selling requires forethought, strategizing, and careful implementation. When you are ready to take steps to get your company sold, ensuring a transaction is structured in a tax-efficient manner is critical for maximizing a seller’s return. Evaluating the various structuring alternatives before undertaking a formal sale process allows the seller to choose a preferred structure and set expectations with prospective buyers regarding deal structure at the outset. Involve your legal and financial advisors early on and be proactive. Ready to Sell? Here are some structures for you to consider and some advantages and disadvantages of each in analyzing what optimizes outcomes for you. Mergers A merger of equals is when two companies who are essentially equal combine into one. Typically, after the merger, only one CEO runs both companies, and the staff is combined (which may result in some staff being redundant). A merger is rarely equal… In a merger, two companies that are distinct legal entities are consolidated into a single legal entity that holds the original companies’ combined assets and liabilities. In a “reverse triangular merger,” which is the most common type of merger, a buyer creates a wholly-owned subsidiary company where at the closing, your company’s equity holders’ interests are canceled in exchange for “merger consideration,” most commonly in the form of cash or stock issued by the buyer. The buyer merges its subsidiary with and your company, with your company “surviving” the merger as a wholly-owned subsidiary of the buyer. Reverse-mergers, or RTO’s In 2020, the market saw an unprecedented spike in reverse mergers where operating companies obtained an exit in the public markets by combining with a special purpose acquisition corporation, or SPAC. More on SPACs here. Acquisitions An acquisition is different than a merger insofar as that that one company is clearly the buyer. This may also be structured as a “reverse triangular merger.” The other company comes under them, and the company acquired often loses its name and is absorbed into the buyer. Separate branding disappears, and the seller’s operations are typically fully integrated into buyer’s operations. This is often actually the case with mergers as well. One company is usually less equal, meaning that it is an acquisition, not an actual merger at the end of the day. The buyer CEO often stays in her position, and the other company name eventually disappears. If your company is being acquired, you need to understand this. If you are acquiring another company or merging, you need to establish what it looks like early on. The advantage of a reverse triangular merger, and why it is the most common form of M&A transaction, is because it accomplishes two fundamental goals: • Minimal disruption to seller’s commercial activities, as the seller’s legal status is uninterrupted, and therefore contracts, licenses, leases and other operations are not terminated or disrupted by statute (although each agreement must be reviewed to check that the terms do not specify a consequence in case of merger or acquisition) • Minority shareholders can be “squeezed-out” by a majority of the voting shares, and no one stockholder can hold the others “hostage” or hold up the transaction pending a concession to them, and not every stockholder and option holder must sign a document. Read Complete Article Here: Louis Lehot: Ready To Sell Your Startup In 2021?