Purchase and sale

business asset purchases and sales

Buying Or Selling A Business: The Basics

If you’re buying or selling a business, the deal will often be structured as an asset purchase. Depending on the specific facts of the situation you may want to structure the deal as a stock purchase or even as a merger.

Asset Purchase

The easiest and least risky (for the Buyer) to buy a business is to purchase a seller’s assets, free and clear of any liabilities. The purchaser is not actually buying the business entity itself. An asset purchase is much like buying the seller’s merchandise without buying the store. The purchaser receives the particular assets he wants, customer lists, and usually some sort of non-competition and non-solicitation agreement from the seller.

The buyer usually prefers an asset purchase agreement for some of the following reasons:

  1. The buyer has the ability to acquire assets only and avoid assuming many of the liabilities of the seller. Some liabilities though will pass through to the purchaser as a “successor business” if the purchaser buys substantially all of the seller’s assets. Careful research and “due diligence” must be performed to make sure that no liabilities will pass to the purchaser with the newly acquired assets.
  2. The buyer can also pick and choose which assets to acquire. The buyer can avoid purchasing obsolete inventory or equipment.
  3. Conversely, the seller can choose which assets to keep.
  4. The buyer gets a “stepped-up” tax basis on the assets being acquired. Often this will cause a tension between the purchaser and seller with respect to the allocation of the purchase price towards assets, goodwill, noncompete agreements, and the like.
  5. The buyer usually has the option but not the obligation to hire employees of the seller’s business.
    The buyer also has the ability to pick and choose which contracts to assume.

There are numerous considerations to include in a business purchase agreement. Even a small purchase could cause large dollar problems if you have purchased the seller’s tax liability.[/one_half]

Stock Purchase

In simple terms, a stock purchase may require only that the selling shareholders swap their stock certificates for a check from the buyer. In contrast to an asset purchase, the buyer is actually taking over the seller’s store and not just purchasing the merchandise. In essence, the buyer steps into the shoes of the selling shareholders, with all the good and bad that goes with it.

All other things being equal, sellers will usually prefer a stock purchase agreement because of favorable tax consequences especially if the business is a c-corporation. Sellers may be able to realize capital gains treatment on the sale of stock. This avoids “double taxation” that can result with an asset purchase where the business entity is first taxed on sales proceeds, and the shareholders are then taxed again on distributions that may then be made to them with the “winding up” of the business.

The result can be a seamless change of ownership. The “store” may look like it is under new management but title to corporate assets and everything else can remain the same. Thus, there is a better chance of preserving the status quo. Employees can remain in place. It may not be necessary to change title to assets or assign existing contracts to a different business entity. Good will and other intangible assets remain with the seller’s business.

Buyers are wary of stock purchases because they end up assuming liabilities of the seller. Thus, a seller must anticipate that a buyer will expect some concessions. The buyer may, for example, insist on very strong indemnification language from the seller in the purchase agreement or the escrow of purchase money to protect the buyer from undisclosed liabilities. The purchase price may also be adjusted accordingly.

Merger

A merger is the combination of two or even more businesses. A merger has some characteristics of both an asset purchase and a stock purchase. In most cases, a “surviving” corporation will issue new stock to shareholders of the business that has been “merged out of existence” for their stock in their corporation. The surviving corporation then takes title to all the assets of the company that has “merged out of existence” which then ceases to exist. Properly structured, swapping stock will not result in any taxable gain to the shareholders of either of the merging organizations.

The Purchase Agreements

Most purchase agreements have to deal with similar issues regardless of the businesses involved, so many of the same kinds of provisions will be found in most purchase agreements, including the following:

  • Introductory provisions. The agreement typically begins with a recital of the parties and a description of the transaction, and contains the definitions of terms.
  • Terms of the transaction. Every acquisition agreement contains a description of the structure of the transaction, the purchase price, the time and method of payment of the purchase price, and other matters relating to the terms of the transaction.
  • Closing. The acquisition agreement contains a provision as to the time and place of the closing and the documents to be delivered by the purchaser and the seller.
  • Conditions to the obligations of the purchaser. After the acquisition agreement is signed, there are typically other steps that need to be taken before the transaction can be closed, such as competing UCC lien searches or securing tax clearance certificates. There are also a variety of conditions that must be met for the purchaser to be obligated to close the transaction. For example, the agreement sets out representations and warranties made by the seller and states that the purchaser can terminate the agreement if those representations and warranties are not met.
  • Conditions to obligations of the seller. The agreement also includes conditions to the seller’s obligations to close the transaction. While the purchaser typically makes very limited representations and warranties in a cash transaction, it makes significantly more if it is issuing stock or debt instruments to the selling company or the selling shareholders. These include many of the same representations and warranties made by the seller.

If you purchase a business without good legal and accounting advice, you are truly purchasing a “pig in a poke”. It is far less expensive to correct problems on the front end of a transaction rather than after the deal has closed. Your experienced transactional lawyer will typically save you many times his or her fees by identifying and resolving potential problems before closing.

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