Mergers & Acquisitions
A purchase agreement (whether it be a merger or acquisition) is an important part of the process of buying a business. To better understand your possible options when buying a business, read on.
Asset Purchase or Business (Entity) Sale Agreement
Purchase contracts are generally structured either as a contract to purchase an entity (corporation, llc, llp, etc.) or a contract to buy the assets of a business.
Entity purchase agreements, a.k.a. stock purchase agreements
When the buyer purchases a business entity by purchasing the majority of its stock, it is referred to as a stock purchase agreement. Usually, the new owner assumes the former owners obligations through the company, taking on all of the company’s debts and obligations. Stock purchase arrangements are disfavored for a number of reasons, including that a company’s unknown or known liabilities continue to be owed by the target business.
Asset sale agreements
When using an asset sale agreement, the purchaser buys the company’s properties (assets), instead of the stock itself. Asset sale agreements usually include a business’s real property as well as personal property, including equipment, inventory and intellectual property, such as patents, trade secrets, trademarks and copyrights. Asset purchase agreements are the only way to purchase a sole proprietorship or partnership, since such businesses have no corporate shell or stock to buy.
Which to use: Stock Purchase Agreement or Asset Purchase Agreement?
In choosing which method of acquisition to use, two central issues should be assessed: taxes and business liabilities. With respect to taxes, an asset sale is often better for the purchaser since the purchaser can begin depreciating the assets earlier than under a stock purchase agreement. Conversely, sellers usually prefer an entity purchase because the seller pays taxes only at the low long-term capital gains rate. Of course, these preferences can change as a result of changes in tax rates and other tax laws.
With respect to debts and liabilities, an asset sale is usually preferable for a buyer, because the buyer will not be responsible for existing debts of the business unless the buyer agrees to take them on (there are some theories of successor liability, but generally, such liability theories require exceptional circumstances). Conversely, with an entity sale, the buyer (the new business usually) will take on all liabilities of the previous business after the sale.
Getting Help with an Acquisition Agreement
If you’re thinking about entering into an acquisition agreement to buy or sell a business, you may find that things can get pretty complicated fairly quickly. If you would like to speak with an attorney, call now to schedule a consultation.