The Law Offices of Paul H. Appel – Your Trusted Business Law Partner in New Jersey
Entity Restructuring · Before a Deal
Sometimes the business a buyer wants is not neatly contained in one company — or the company holds things the seller wants to keep. Restructuring before closing reshapes the entity so the transaction can be done the way both sides need.
Why restructure first
Buyers purchase a defined business: a set of assets, contracts, employees and goodwill, with known liabilities. Real companies are messier. The operating business may sit in the same entity as the owner's building, a second unrelated line of work, or a lawsuit the buyer will not touch. Or the buyer wants to acquire equity rather than assets, but the selling entity's type or tax status makes that inefficient.
A pre-closing restructuring solves these mismatches by moving assets, creating new entities or changing the entity's form so that what is being sold is exactly what the parties intend. Done well, it can preserve contracts and licenses that would be hard to assign, separate property the seller is keeping, and let the parties use the deal structure their tax advisors recommend.
Restructuring of this kind is part of the firm's business transactions work. It is closely tied to the choice between buying assets or buying stock, because the restructuring is often what makes the preferred structure possible.
Common techniques
Each technique has its own approvals, filings and tax effects. Which one fits depends on what is being sold and to whom.
A division or product line is separated from the rest of the company so it can be sold on its own, often by transferring its assets and contracts to a new entity.
The seller forms a new subsidiary, contributes the business being sold to it, and then sells the subsidiary's equity — which can let contracts and permits travel with the entity.
Owners place a parent above one or more operating companies, making it possible to sell one subsidiary, admit investors at the parent level, or keep real estate in a sister entity.
The company changes its legal form — for example, a corporation becoming an LLC — under New Jersey's conversion provisions, with approval of the owners and a state filing.
Real estate, vehicles or investments the seller keeps are moved out of the selling entity before closing, often with a lease back to the buyer.
Ownership classes are restated — voting and non-voting units, preferred interests, or redeemed minority holders — so the cap table is ready for the buyer.
Pitfalls
Timing
Consents, filings and new tax registrations take time. A restructuring compressed into the last weeks before closing is where errors happen and where buyers get nervous. Start as soon as the structure is agreed in the letter of intent.
Liabilities
When assets move to a new entity, liabilities may follow by contract, or a creditor may argue they followed by law. Successor liability doctrines and New Jersey tax rules can reach a transferee; see successor liability in New Jersey.
Contracts
A contribution to a subsidiary or a conversion can itself be an assignment or change of control under some contracts. Read the clause before assuming the restructuring sidesteps it.
Tax
Conversions, contributions and distributions can create taxable events, and some reorganizations used by S corporation sellers have strict technical requirements. Every step should follow a written plan from the client's tax advisor.
Sequence
Agree with the buyer exactly which assets, contracts, employees and liabilities make up the business being sold — and which stay behind.
The seller's and, often, the buyer's tax advisors recommend the steps. Legal documents are drafted to match that plan precisely.
List every approval needed: owners, lenders, landlords, key customers, licensing bodies, and the state filings for formations, conversions or mergers.
Form new entities, transfer assets, convert or merge, and update registrations in the sequence the plan requires — usually before the purchase agreement closes, sometimes simultaneously.
The purchase agreement should describe the restructuring and include representations about it, so the buyer's due diligence can confirm it was done correctly.
Buyer side
Buyers also restructure — usually after closing — to fit the acquired company into their existing group. Typical tasks include:
Post-closing work of this kind is covered in more depth on the post-merger integration page.
Questions
Usually because the company and the business being sold are not the same thing. The entity may hold real estate or a second line of work the seller is keeping, carry a liability the buyer refuses, or have a form or tax status that makes the preferred deal structure inefficient. Restructuring isolates exactly what is being sold so the transaction can proceed cleanly.
A carve-out separates one part of a business — a division, location or product line — from the rest so it can be sold or financed independently. It typically involves moving that unit's assets, contracts and employees into a new entity, agreeing transitional services between the old and new businesses, and making sure shared resources such as IT systems or premises are dealt with.
New Jersey law permits many entity conversions, including corporations becoming LLCs, through an approval by the owners and a filing with the State. A conversion can have significant tax consequences, and contracts, licenses and bank accounts may need updating. Confirm the tax effect with your accountant before approving any conversion as part of a deal.
It can, which is often the reason for doing it — and also the main risk. Some restructurings allow a buyer to obtain the tax treatment of an asset purchase while acquiring an entity; others create tax for the seller if done incorrectly. The legal steps should follow a written plan from your tax advisor, and the firm does not provide tax opinions.
Your attorney
Every matter at the firm is handled personally by Paul — the same attorney reads the documents, gives the advice and negotiates on your behalf.
Contact
Describe what the business is dealing with — a contract on your desk, a deal in progress, a dispute or a company you are about to form. You will hear back from the attorney who handles the work.
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