In handling a lot of mergers and acquisitions (M&A) transactions over my career, I have seen buyers purchase companies in a variety of ways. In a M&A transaction, consideration is the payment made by the buyer to the seller in exchange for their ownership in the company or for the company’s assets. While cash is routinely used in these transactions (whether or not financed), one type of consideration that may be offered is stock or stock options. While they may seem similar, there are key differences between the two.
Stock represents ownership in a company and gives shareholders certain rights, such as voting rights and the ability to receive dividends. When stock is offered as consideration in an M&A transaction, the buyer typically offers a certain number of shares of their own stock in exchange for the shares of the seller’s company or for the seller company’s assets. The value of the consideration is therefore dependent on the value of the buyer’s stock at the time of the transaction, which can be unstable, unpredictable, and subject to market conditions.
On the other hand, stock options give the holder the right to buy a certain number of shares of a company’s stock at a predetermined price (we often refer to this as the “strike price”) within a specified period of time (often called the “exercise period”). When stock options are offered as consideration in an M&A transaction, the buyer typically offers options to purchase a certain number of shares of their own stock in exchange for the shares of the seller’s company or for the seller company’s assets. The value of the consideration is therefore dependent on the difference between the strike price and the market price of the buyer’s stock at the time of exercise.
While I won’t be exploring tax implications here, it is important to note that there are different tax treatments for stock and stock options. In the next installment, we’ll review a few advantages and disadvantages of each.
If you are exploring purchasing or selling a business, reach out to me, and I’d be happy to discuss.