Where’s Our Money?

Unless you’ve been hyper-focused on your business of late, you have probably heard a bit about the banking issues at Silicon Valley Bank and Signature Bank.  Moreover, like most, you are probably saying to yourself:  My bank is safe, I have nothing to worry about.

For the most part, your right and the issues seem to have a unique set of circumstances.  However, these situations bring up a lot of questions related to your organization’s internal processes for handling financial transactions.  If you don’t know what I mean, how about I ask the following:

  1. How much of your business banking is with one institution?
  2. Who has access to the business bank accounts and can write checks or update the account?
  3. What happens if you change your bank account?
  4. How do you notify your clients and vendors of an account change and who is in charge of that in your organization?
  5. What is your process for updating a change in a client or vendor bank account?  How do you verify the requested change and who does it in your organization?
  6. What is the process for reconciling your bank statements to your monthly financials?
  7. How often do you reconcile your bank statements?
  8. Who handles the reconciliation process in your organization?
  9. Is there a backup person to reconcile the statements?
  10. What happens if there is fraud in your account?  Are you covered by insurance or with your legal agreements?

If you are having trouble answering the questions above, you are putting your organization at risk.  I would highly suggest you come up with a process to handle the financial transactions in your business.  Your professional business advisors (accountant, lawyer, financial advisor, etc.) are a great place to start if you don’t know who to ask for help.

Here are some other items of interest:

As always, please don’t hesitate to email myself (jsanders@mpl-law.com), Andy Miller (amiller@mpl-law.com), Christian Miller (cmiller@mpl-law.com), Erik Spurlin (espurlin@mpl-law.com), Brad Leber (bleber@mpl-law.com) or anyone in our office with questions or comments.  

Please see all of our prior updates at this link or if you would like to be added to our email list, please click here.  

Merger Structure Rundown: 338 Elections

As if the M&A world could not get any more complicated, I am going to blow your mind again.  There are situations where an acquisition could be treated as both and Asset and a Stock purchase at the same time.  I know, you are probably saying that this has to be a mistake that was missed on some 10,000+ page unrelated bill passed by Congress.   However, it is not.  Yes, the structure I am talking about is a 338 election.

Section 338 of the Internal Revenue Code allows for a corporate buyer and the selling entity to jointly elect to treat a stock purchase as an asset purchase for federal tax purposes (FYI, Section 336 is the applicable code provision for non-corporate buyers like LLCs).  The selling entity is treated as selling its assets to the corporate buyer for the agreed upon stock purchase amount.  In simpler terms, the Buyer gets a tax basis step-up advantage and the underlying selling entity remains in existence.

A regular 338 election is not typically used because there is a double taxation issue.  The Seller would be taxed at the entity level for the gains on its asset sale and the seller’s shareholders would then be taxed on the sale of their equity.  So, what do you do?

If you read Section 338 a little more (good cure for insomnia), you will see that there is a special 338(h)(10) election that can be made to alleviate this double taxation issue.  Essentially, the stock sale is ignored for tax purposes if the requirements below are met:

  • The Selling Company is an S Corporation; or
  • The Buyer buys the stock of the Seller from one or more of the “corporate” shareholders of the Seller (i.e., you can’t buy stock from individual shareholders).

If your transaction looks like the above, then a 338(h)(10) might be right for you.  However, keep in mind that the underlying entity remains along with its liabilities.

Your professional business advisors (accountants, attorneys, financial advisors, etc.) are the best place to go and discuss this structure.

Below are some good overviews of the different transaction structures (repeat from last week):

Here are some other items of interest:

Additional Merger Structure Rundowns

This blog post is part of a series on different types of merger structures. You can find the other structure rundowns at the links below:

As always, please don’t hesitate to email myself (jsanders@mpl-law.com), Andy Miller (amiller@mpl-law.com), Christian Miller (cmiller@mpl-law.com), Erik Spurlin (espurlin@mpl-law.com), Brad Leber (bleber@mpl-law.com) or anyone in our office with questions or comments.  

Please see all of our prior updates at this link or if you would like to be added to our email list, please click here

Merger Structure Rundown: Reverse Triangle Strategy

One of the beauties of the triangle offense is that it works in both directions.  In a similar way, the reverse triangular merger strategy has the same benefit.  The Purchasing Entity (the “Purchaser”) creates a subsidiary, which then acquires the Selling entity (the “Seller”).  The key difference is that the Seller, through the Purchaser’s subsidiary, retains its identity.

Benefits

  1. Contracts – Because the Seller retains its identity, any third-party contracts that were previously in place do not have to be assigned or modified (e.g., think about the issues of becoming a new vendor to the government or a large corporation)
  2. Less complexity – Because a true merger or asset acquisition is not taking place, the acquisition of the Seller by the Purchaser is typically faster.  On the flipside, if the acquisition does not work out, the Seller can be resold.

Drawbacks

  1. Liabilities – The Seller may have legacy liabilities (e.g., lawsuits, taxes, etc.) which will have to be dealt with by the Purchaser.
  2. IRS Requirement to be tax free – 80% of the Seller’s stock must be acquired with voting stock of the Purchaser (i.e., this is not heavy cash up front deal for the Seller).  This may make these transaction structures less attractive for a Seller looking to truly exit.

 Below are some good overviews of the different transaction structures (repeat from last week):

Here are some other items of interest:

Additional Merger Structure Rundowns

This article is part of a series on different types of merger structures. You can find the other structure rundowns at the links below:

As always, please don’t hesitate to email myself (jsanders@mpl-law.com), Andy Miller (amiller@mpl-law.com), Christian Miller (cmiller@mpl-law.com), Erik Spurlin (espurlin@mpl-law.com), Brad Leber (bleber@mpl-law.com) or anyone in our office with questions or comments.  

Please see all of our prior updates at this link or if you would like to be added to our email list, please click here.  

Merger Structure Rundown: Forward Triangular Merger

As Phil Jackson showed, triangles can be a very powerful tool for winning championships.  They are also the basis for two successful merger strategies.  Perhaps if Phil Jackson was not a coach, he would have been a successful M&A advisor.  In today’s update, we look at the Forward Triangular Merger.

A forward triangular merger involves the Purchasing company (the “Purchaser”) acquiring the Selling company (the “Seller”) through a subsidiary company (the “Subsidiary”) that is wholly owned by the Purchaser.  Post-acquisition the Seller disappears and the Subsidiary is all that remains.

Benefits

  1. Tax – The Purchaser can use a combination of cash and stock (up to 50%) to acquire the Seller through the Subsidiary.  This can provide tax benefits for the Purchaser.
  2. Liability – Because the Seller is acquired through a subsidiary, there is a liability shield in place to provide protection for the Purchaser from pre-acquisition issues of the Seller.

Drawbacks

  1. Third Party Consents – The Purchaser usually has to get third-party consents for any contracts that the Seller had in place.

Below are some good overviews of the different transaction structures (repeat from last week):

Here are some other items of interest:

Additional Merger Structure Rundowns

This blog post is part of a series on different types of merger structures. You can find the other structure rundowns at the links below:

As always, please don’t hesitate to email myself (jsanders@mpl-law.com), Andy Miller (amiller@mpl-law.com), Christian Miller (cmiller@mpl-law.com), Erik Spurlin (espurlin@mpl-law.com), Brad Leber (bleber@mpl-law.com) or anyone in our office with questions or comments.  

Please see all of our prior updates at this link or if you would like to be added to our email list, please click here.  

Merger Structure Rundown: Forward (Direct) Merger

As promised, I am spending the next few updates highlighting different merger structures.  In case you did not know (and trust me it is not something you read on a daily basis), the three main merger structures are a Forward (Direct) merger, a Forward Triangular Merger and a Reverse Triangle Merger.  I think the creator of these structures may have either moonlighted as a spiritual advisor or spent time in battle, but what do I know.

Below is a rundown of the Forward (Direct) Merger:
A forward merger involves the Selling company (the “Seller”) merging directly into the acquiring company (the “Purchaser”).  The Seller ceases to exist post-closing and the two companies become a single entity under the Purchaser’s name and structure.

Benefits
It is very simple. It is tax friendly for the Purchaser because it is usually treated as an asset acquisition.  Therefore, the Purchaser gets a step-up in basis on the Seller’s assets equal to the purchase price.  In layman’s terms, it means that in addition to the larger depreciation deductions available, any future sale of the Seller’s assets would result in a smaller tax liability.

Drawbacks
Double taxation is still a risk.  First, the transaction is taxed at the corporate level and then again at the shareholder level.  The Purchaser is generally not shielded from the liabilities of the Seller.
The Purchaser usually has to get third-party consents for any contracts that the Seller had in place.
Here are some other useful M&A Articles:

Here are some other items of interest:

Additional Merger Structure Rundowns

This blog post is part of a series on different types of merger structures. You can find the other structure rundowns at the links below:

As always, please don’t hesitate to email myself (jsanders@mpl-law.com), Andy Miller (amiller@mpl-law.com), Christian Miller (cmiller@mpl-law.com), Erik Spurlin (espurlin@mpl-law.com), Brad Leber (bleber@mpl-law.com) or anyone in our office with questions or comments.  

Please see all of our prior updates at this link or if you would like to be added to our email list, please click here.