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Friday, April 22, 2011

Stock Purchase or Asset Purchase?

There are two principal methods for buying or selling an existing business: a stock purchase and an asset purchase. The advantages and disadvantages of each method should be assessed in every business sale. The purpose of this article is to explain in very general terms how these methods (and the resulting implications) differ. You may also want to view our YouTube video on asset purchases at: http://www.youtube.com/watch?v=UtM8GXiOSwE

In the stock purchase, the buyer purchases the existing ownership interests of the business. If the business is a corporation, the buyer is purchasing stock. If the business is a limited liability company, the buyer is purchasing membership interests. By making such a purchase, the buyer acquires an ownership interest of the existing business and assumes all rights and responsibilities which come with such ownership. Typically, such rights and responsibilities are set forth in the by-laws or shareholder agreements of a corporation, or the operating agreement of a limited liability company. The stock purchase is typically used when the existing business has valuable contracts or licenses that cannot be transferred.

In the asset purchase, the buyer purchases the existing assets of the business, but does not purchase any ownership interest in the seller’s business entity. Oftentimes, the selling entity will be terminated after the asset purchase. The asset purchase is typically used so that the buyer can acquire the business and assets of the selling entity without paying or assuming all of the selling entity’s debts. In some cases, the trade name of the seller is one of the assets purchased by the buyer, and the buyer will operate under the same as the seller after the sale; by this process, the buyer purchases the brand and existing goodwill of the seller, but does not assume the selling entity’s liabilities. Transferring the name without transferring the liabilities can be very complex and should only be handled by an experienced lawyer, or the buyer may assume responsibility for disclosed and undisclosed liabilities of the seller.

In every sale, the parties should consider the advantages and disadvantages of both methods. Typically, the buyer will choose the method of purchase after commencing a due diligence investigation of the business. A proper due diligence investigation will reveal the corporate organization and registration of the seller, the specific assets owned by the seller, the existing contracts and obligations of the seller and the history of seller’s taxes, liens and legal disputes, etc. This information will oftentimes determine how the buyer wishes to proceed. A more detailed explanation of the issues a purchaser should investigate can be found here.

The attorneys at Gross & Romanick, P.C. have substantial experience in preparing and negotiating both stock purchase transactions and asset purchase transactions. They understand the implications of each method on both the buyer and the seller, and can artfully draft the sale documents to protect the best interests of their clients.