M&A SELL-SIDE TRANSACTIONS: LEGAL, FINANCIAL AND OPERATIONAL CONSIDERATIONS By LEN GARZA, ESQ.
GARZA BUSINESS & ESTATE LAW, LLC
Mergers and acquisitions (M&A) are inherently complex, involving multiple layers of legal, financial and operational considerations. Understanding the legal issues and considerations for the target company is crucial to ensuring a smooth transaction and mitigating potential risks.
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WINTER 2024/25 | NEW JERSEY CPA
STRUCTURING THE TRANSACTION: ASSET VERSUS STOCK SALES One of the most critical early-stage decisions is whether to structure the deal as an asset sale or a stock sale. This decision has significant tax implications and affects the parties’ liabilities and post-transaction control.
may require robust representations and warranties or indemnification provisions to protect against these risks. Understanding the tax and liability implications of these transaction structures is critical to ensuring that companies make informed decisions that align with their business goals.
y Asset sales: In an asset sale, the buyer acquires specific assets and liabilities of the target company. This structure is desirable to a buyer if the seller owns assets that the buyer does not want, or if the buyer believes the seller has significant unknown liabilities that the buyer does not want to assume. It’s important to keep in mind that even when the buyer does not explicitly assume certain liabilities from the seller, there may be certain liabilities the buyer cannot avoid such as when the buyer is merely a continuation of the seller or the transaction is an attempt to defraud the creditors of the seller.
DUE DILIGENCE: UNCOVERING HIDDEN LIABILITIES For sell-side clients, due diligence involves preparing for a comprehensive review of their financial, operational and legal documentation. From a legal perspective, due diligence focuses on identifying potential liabilities that could impact the transaction’s value or feasibility. Key areas of concern include the following:
y Stock sales: In a stock sale, the buyer purchases the seller’s ownership stake, acquiring the entire company, including its assets and liabilities. Sellers typically prefer stock sales for the simpler tax treatment and the ability to pass on existing liabilities to the buyer. On the flip side, buyers may be wary of the potential for unforeseen liabilities and
y Regulatory compliance: Noncompliance with industry-specific regulations or general business laws can halt a deal in its tracks. A thorough review of licenses, permits and regulatory filings is essential.
y Pending or potential litigation: Legal disputes, even those that are seemingly minor, can be a red flag for buyers as they may lead to unforeseen costs or reputational damage.
y Real estate liabilities: If the target company owns or operates real estate,