Structuring the Purchase and Sale of a Business

Planning for the sale or purchase of a business starts long before signing a letter of intent or a purchase and sale agreement. Attorneys must weigh competing legal, tax and business considerations on behalf of their clients. As a threshold issue, clients typically must decide whether they prefer an asset sale or stock sale structure when buying or selling a business.

IN AN ASSET SALE, the buyer acquires specific assets and specific liabilities (or often no liabilities) of the target company. Post-closing, the buyer and seller retain their legal entity and the seller retains those assets and liabilities not purchased by the buyer.

Sellers may not like asset sales for a variety of reasons. A buyer may prefer an asset purchase for the same reasons. Here are a few of those:

* The seller is left with liabilities not assumed by the buyer.

* The seller often has to analyze all of its contracts (even the water cooler lease agreement) for ability to assign to buyer.

* The seller typically receives better tax treatment when selling stock, and the buyer typically prefers asset sale tax treatment (a common point of negotiation).

Asset sales can be more complicated than stock sales because:

* Depending on the type of asset, assigning specific assets may require custom tailored transfer paperwork.

* In connection with scouring documents for relevant assignment language, consents to assignment must be obtained for those agreements that contain anti-assignment language.

IN A STOCK SALE, the buyer acquires the target company's stock directly from the shareholders. With said stock come all of the target company's assets, rights and liabilities, unless specifically carved out. Following the transaction, the target company maintains its corporate existence.

Sellers often prefer to sell stock for these reasons:

* The buyer often assumes the target company's liabilities.

* Sellers typically receive better tax treatment.

* The target company's contracts will not need to be assigned. (Buyers like this too.)

Stock sales are often less complicated than asset sales because:

* There is generally less need for third party consents from those parties under contract with the target company.

* When the stock is sold, the assets go along with it and continue to be owned by the target company, thus alleviating the need to assign specific assets.

This article touches on only a handful of the important structural considerations that buyers and sellers face when approaching the sale or acquisition of a business. Generally speaking, you may conclude that buyers prefer asset sales and sellers prefer stock sales, yet there are ways to structure hybrids in order to help parties meet in the middle. In addition to considering structure, buyers and sellers alike need to be acutely aware of how best to protect from liability arising out of the sale or purchase of a business.