How to Purchase a Business: Three Strategies

Article by Joanne Cassidy

The primary ways to buy a closely held company, one that has few shareholders and is not traded on the open market, are

  1. Merger
  2. Stock purchase
  3. Asset purchase

Each purchase structure has advantages and disadvantages and if you are considering buying a business it is absolutely essential to first discuss the structure of the deal with your business attorney and your CPA.

This article will briefly discuss the three business purchase structures.  More detailed information concerning asset purchases and stock purchases can be found in related articles on this web site.

Merger

A merger occurs when one company dissolves or merges into another company.  You might think of it as two companies coming together and creating one mega company, called the surviving company.  Following the merger, the surviving company typically owns all of the merged, or target, company.  There are several types of mergers and the type chosen in a particular situation is largely dependent upon your goals and certain tax considerations.  The tax rules governing mergers are extremely complicated and if you are considering a merger, you are well advised to work with a sophisticated tax advisor at all stages of the acquisition.

Stock purchase

A stock purchase occurs when the owner or owners of the stock of a company sell the stock to the acquiring buyer. In general, a stock sale is favored by the seller of a business while an asset sale is favored by the purchaser of a business.

The buyer of stock must very carefully consider tax and liability issues before entering into any kind of stock purchase and sale agreement. Once again, your business lawyer and tax advisor should be consulted during all phases of the transaction.

The primary legal issue to consider in a stock purchase is whether you, as buyer, really want to buy the company’s liabilities as well as its assets.  There may be liabilities that you are willing to accept, others that the seller can dispose of prior to closing the sale, and still others that the seller is willing to indemnify you against. The question always is: are there are any other liabilities out there that we don’t know about and if there are, how are you going to deal with them.

An advantage of a stock sale is that it’s easy. The buyer and seller do not have to distinguish between assets that are being purchased and those that the seller is keeping, title to assets do not have to be transferred, the buyer does not have to create a new company for the purchase and, with the exception of certain contractual or regulatory requirements, the buyer can very quickly carry on business as usual.

Asset Purchase

 An asset purchase transfers ownership of all or some assets of a business to the buyer.  The buyer and seller may also agree to transfer some of the company’s liabilities as part of the purchase price.  The primary advantage of the asset sale is that the buyer and seller specify which assets and liabilities, if any, are to be transferred.  If the Buyer has done his due diligence in investigating the company, he knows exactly what he is buying and does not become burdened with unwanted, and unplanned for, liabilities.

Under some circumstances, an asset purchase can be more cumbersome than a stock purchase.  The purchaser and seller must make a list of the assets being sold.  That can be a list of specific items or a list of categories of items.  In any event, the list must be specific enough to be able to identify those items being transferred.  The closing of the sale must also include documentation of transfers such as bills of sale, vehicle transfers, real property deeds and lease assignments.  Your business lawyer can prepare all required documentation so that in most cases these ownership transfers are not unduly burdensome.

Summary

Buying a business does not have to be difficult.  Your business lawyer can help you with: (a) the due diligence assessment of the viability of the business, (b) the decision with respect to what form of acquisition is best for you, (c) the efficient and effective transfer of the company stock or assets and (d) all documents and filings required to give you a healthy start to growing your new business.