When Seeking to Buy a Business, One of the First Decisions You Need to Make is Whether to structure the Transaction as a Stock Purchase or an Asset Purchase
When seeking to buy a business, one of the first decisions you need to make is whether to structure the transaction as a stock purchase or an asset purchase. As with any business decision, there are advantages and disadvantages of each that must be carefully considered.
In the case of purchasing a sole proprietorship, partnership, or limited liability company (LLC), the decision is already made for you because the business entities do not have stock. Although, in addition to buying the business’s assets, you may also be able to buy a member’s interest in a partnership or LLC.
Liability in Asset Purchase Compared to a Stock Purchase
When acquiring a C-corporation or S-corporation, the structure of the transaction can determine how much liability you assume. If you buy control of the stock of the corporation that owns the business, you take ownership of the business, and responsibility to pay its liabilities and potential liabilities. Because buyers of stock step into their acquired business in a stock sale, these deals require businesses to perform due diligence and to investigate and understand the liabilities and potential liabilities of the acquired business operations.
For example, there may be pending or threatened litigations, or issues of liability involving taxes, customer claims, workers’ compensation, pension or unemployment benefits, independent contractor misclassification, or even for traffic accidents or unpaid invoices. These all become your responsibility as the buyer in a stock sale.
Although there are contract provisions that are often utilized to protect the buyer, the best protection is a quality due diligence investigation of the business by outside counsel. If there are liabilities disclosed or discovered, and also to protect against undiscovered liabilities, counsel can prepare provisions for the acquisition or merger agreement that include indemnification, hold back of a portion of the purchase price, or a deferred business earn-out payment.
If you buy the business’s assets, you may choose to buy some or all of the assets of the target business. In doing so, you may be able to avoid the liabilities of the business. This is because, if properly structured in an asset purchase agreement, you are only buying assets rather than the operating business and its liabilities. The asset purchase must be carefully crafted so that the buyer in an asset sale does not inherit liabilities. Issues can arise related to integrating the business’ employees into your company’s business, so union contracts and state laws are considered. You may wind up hiring all, or only some, of the employees; often, some of the employees are let go after a trial period, and this can require treading carefully.
Additional Considerations in Asset Purchase vs Stock Purchase
When considering a business acquisition, there are several other considerations to keep in mind. In many cases, an asset sale is less complex. Buyers do not have to worry about minority shareholders that may be unwilling to sell their stock. In addition, there are few, if any, securities regulations with which to contend. In terms of tax obligations, if the purchase price is greater than the aggregate tax basis of the assets purchased, the buyer receives a stepped-up basis in the assets equal to the purchase price.
Despite these advantages, a stock sale also has certain merits. In a stock transaction, you don’t have to go through the hassle of having the acquired company’s assets re-titled in your name. In addition, a stock transaction generally allows you to obtain the acquired company’s non-assignable contracts, permits, and licenses without obtaining the consent of the other party to the transaction. There may be contract provisions that were entered into by the seller that void the contract on the sale of control; your due diligence investigation should include a review of all material contracts.
If you have any questions or if you would like to discuss the matter further, please contact me, Dan Brecher, or the Scarinci Hollenbeck attorney with whom you work at 201-806-3364.
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