Purchase and Sales Agreements

One of the most important steps of the business transfer process involves negotiating and drafting the purchase/sales agreement. Below are some important considerations when deciding how to structure your deal and the related transaction documentation:

Type of Purchase: Asset vs. Stock

The two main forms of purchase transactions are either asset purchases or stock purchases:

• Asset Purchase: Under an asset purchase structure, a buyer purchases some or all of the selling business’ assets—and may also assume responsibility for certain liabilities of the selling business. The asset purchase agreement (or “APA”) will identify the tangible property (such as equipment, inventory or real estate, for example) and intangible assets (such as licenses, contracts, leases, or trademarks) being acquired. The APA will also identify any liabilities of the seller that the buyer agrees to assume. After an asset sale closes, the selling entity itself survives under the control of its prior owners—and remains responsible for any of its liabilities that were not expressly assumed by the buyer.
• Stock Purchase: A buyer may purchase all or a portion of the stock (or membership interests, in the case of LLCs) of a business entity. Under the stock purchase structure, the existing business survives—and maintains ownership of the same assets, and is subject to the same liabilities, which existed prior to the transaction. While buyers generally prefer to structure transactions as asset purchases, both for tax reasons and to limit their assumed liabilities, in some cases the difficulty in transferring ownership of some of the business’ assets will cause the parties to use a stock purchase structure.

Considerations

Many factors come into play when determining which structure is best for a particular business transaction—liabilities, taxes, and the nature of the assets being transferred, just to name a few.

• Liabilities: Buyers generally favor asset purchases. Under the asset purchase structure, buyers typically are not held responsible for the liabilities of the selling business that predate the sale—except those liabilities that the buyer expressly assumes. In a stock purchase, however, the entity itself lives on and remains responsible for all liabilities. To address this, buyers will often require that the selling shareholders/members indemnify the buyer from specific liabilities; and in many cases, selling parties will be required to leave a portion of the sale proceeds in an escrow account to cover any future indemnity obligations.
• Taxes: Sellers prefer stock purchases because they will pay taxes at the lower long-term capital gains rates. Depending on the structure of the entity (like if it is a C Corporation, for example), an asset sale will potentially subject the proceeds of the sale to double taxation—once at the corporate level and then again when the proceeds are distributed to the shareholders. Buyers, on the other hand, generally prefer asset purchases. Under the asset purchase structure, the purchase price can be deducted through depreciation or amortization over the life of the assets.
• Assets: In some situations, the nature of the assets being sold may cause a stock purchase structure to be favored over an asset purchase structure. For example, companies may have contracts with partners or customers that prohibit assignment. Similarly, a stock purchase may be favorable when the seller is in a business that requires governmental licenses or permits—since it can be a lengthy and tedious process for a new LLC or corporation to get its own approvals for licenses or permits.

Contact The Castle Law Firm

The process of buying or selling a business can be complicated. It requires careful consideration of many factors—both legal and non-legal in nature. It is important to consult with a thorough, experienced attorney to ensure that you avoid the many pitfalls that business owners may face when transferring ownership interests. The Castle Law Firm is highly skilled at helping its clients find, analyze, and secure business opportunities. Founding partner Rob Castle can guide you through every step of the process, including advising you on deal structure, due diligence analysis, and purchase/sales agreement drafting. Contact the firm online or call (312) 889-8702 to schedule a free consultation today.