The Exit: Everything You Need to Know but Didn’t Know to Ask about Startup Acquisitions

Today we’re diving deep into what most startups dream about and are striving for – the exit. Hutchison PLLC partner and mergers & acquisitions expert attorney Dan Fuchs shares what both founders and buyers should be looking out for throughout the acquisition process.


Trevor Schimdt: Today’s guest is Dan Fuchs, one of the partners at Hutchison who has spent his career guiding companies through all shapes and sizes of mergers and acquisitions.  

On previous episodes, we’ve had our attorneys come on to talk about various legal considerations for startups such as Intellectual Property protection with yours truly, the legal side of raising money – with Anna Tharrington – and the biggest mistakes we see startups make – that episode was with Justyn Kasierski.  If you have not listened to those episodes, I you really should check them out as they cover a lot of the major steps in the life cycle of a company/  

And today we’re diving deep into what most startups we work with dream about and are striving for – the exit. But what we see, is that even for this big event that many dream about, it can often be harder than some expect.

Dan Fuchs: You know, a lot of people compare it to sort of giving up their child. You sort of raise this baby from, from inception and it’s your idea. You’ve nurtured it throughout. It’s probably going to do that with still some guidance from you, but in the hands of other people and sort of on its own and running forward.So that’s one of the things that I think startup founders don’t necessarily think about when they think about acquisition it’s, it is sort of pulling yourself back from this thing that you’ve been so committed to for so long and really letting it run and have a life of its own beyond you.

Trevor Schmidt: And even before your company gets to that life beyond you, many times with the sale of a company, the founder is required to stay on for a certain period of time. For those who have been their own boss, that can be a challenging transition. 

No matter what, selling the company you’ve committed yourself to is challenging and there is a lot to consider. So let’s get to the legal aspects of how it all works…

Dan Fuchs: I think the two primary types of exits that we see in our practice are, you know, stock acquisitions or asset purchases. The stock acquisition is the buying of the entity, and so it encompasses all of the assets, all of the liabilities of the entity in one nice package. An asset purchase acquisition is cherry picking certain assets and certain liabilities. And I like to think of it as buying the business, not necessarily the entity in which the business resides. So those are the two main areas of exit that we deal with in our practice. 

The third one that entrepreneurs often focus on that we don’t directly represent is an IPO or an initial public transaction. Those are generally handled by larger national firms that have strong relationships with the FCC. But in that situation you would have and these are probably the most public and what people know about not listening to this podcast, but then the public markets come in and become the owners of the business. And you would see existing investors, all sort of convert to common stock, still be owners going forward, but have the liquidity after some lockup periods to sell their stock and actually monetize their investment and liquidate it in that way.

For those companies, you don’t see as much transition of management as you would in a private company acquisition through either a merger or a stock sale or asset purchase. But it is another route that a lot of companies, especially the unicorns that you hear about, they will often go public. 

Trevor Schmidt: So what are the different situations where a company might either choose or have forced on them, an asset purchase versus a stock deal versus going public? I mean, what’s the advantage of those different kinds of forms?

Dan Fuchs: The primary advantage for a seller of doing a stock deal is you’re getting the money into the hands of your equity holders directly. You’re not passing it through the company, and as you can imagine, if you’re a corporation and you’re a C Corp, there’s going to be taxation at the corporate level if you were to sell assets, because it’s the entity selling the assets instead of the owners selling their equity in that entity, and so you can get money directly to the stockholders and shareholders. If they’ve held it for over a year, you get long-term capital gains in most instances. So it’s a, it’s a tax advantage play. 

So if you’re a seller, you’re, you’re generally going to want to push for a stock deal, if you are selling the entirety of your business, there are certain situations where, and we see this most often in our life sciences practice, where you might be doing the exit in a way where you’re not actually selling the entirety of the business. You might be selling rights to your drug or your device in a specific geography, and in that instance, a stock deal would not be favorable to you because you can’t parse out what you’re selling and what you’re not, unless you sort of create new entities and spin things out prior to the deal. 

From a buyer perspective, they’re generally, if they have their druthers kind of want to do an asset deal, and the reason for that is there there’s many, but the main ones are the ability to pick and choose and sort of get some separation between historic liabilities and assets that they might not want. You might have a long-term lease that the buyer doesn’t necessarily want to assume. It’s very difficult to handle that in a stock deal, whereas in an asset deal, you could just leave it behind with, with the sellers.

The other main advantage of an asset deal for the buyer is they generally will be able to take a step up in the basis of the assets. And, and so if they’re buying equipment they can, you know, step up the basis to what they’re paying for the equipment in the deal, and then re depreciate it instead of inheriting sort of all of that tax treatment from, from the earlier owner.

In most instances, the buyer’s going to come and sort of dictate what they want in terms of the structure, and there’ll be sympathetic, I guess, is the best way to phrase it, to, to addressing the seller’s tax concerns or other issues with, with why they might not be advantageous to them if they were going to do an asset deal.

But again, it largely comes down to price. So if you’re, if you’re doing a stock deal, you might accept a little bit lower price as the seller, because you get all of the benefits that we talked about before, whereas if you’re doing an asset to you, you would want to price into that. What are the tax ramifications of that for you? What are the liabilities that are staying behind? Those sorts of things. So that at the end of the day, you as the owner, Ha can sort of get to the same place or at least compare apples to apples if you have a multi bidder situation. 

Trevor Schmidt: Yep. And then the IPO is just, if you have the option, is there other, other reasons to do the IPO?

Full Episode Transcript

Hosted by Trevor Schmidt, Founder Shares is brought to you by Hutchison PLLC, and is edited and produced by Earfluence.

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