Should you Buy Assets of a Company or Buy the Stock?
Two of the principal ways of acquiring a business include purchasing of a target company’s assets and purchase of the stock or membership units of the target company. The best option to use in any particular transaction is dependent on a number of factors including:
- Business factors
- Legal issues and ease of transfer
- Tax factors
- Third party and corporate consent & SEC considerations
These factors area analyzed below:
When the purchase of a business is done through an asset purchase, the purchaser only selects the specific assets and liabilities that he/she wants to acquire and assume. This is a big difference from buying the stock or membership units of a company as when an equity purchase is done, the buyer is buying all of the assets and assuming all of the liabilities (known or unknown) that the company has. As such, if an asset purchase is done, the buyer has the option of picking and choosing the assets he/she wants to purchase and does not run the risk of assuming unwanted liabilities. On the down side though, a buyer must spend the time analyzing all of the assets and deciding which ones to purchase and he/she may overlook significant assets. (E.g. an intangible asset may not have immediate value but could in a few years and a buyer may exclude this).
Legal Issues and Ease of Transaction
A stock or membership unit purchase can often be much simpler than an asset acquisition since the buyer only acquires the stock or membership units of the target company rather than purchasing several assets. Generally speaking, asset acquisitions have more formalities associated with them since each asset may require a separate legal document related to the transfer. For example, the seller may need to deliver a separate sale document for each asset and/or execute various proof of ownership documents. In addition, if the membership units and stock is not purchased, the buyer may need to comply with additional legal and documentation requirements to transfer some intellectual property. Finally, asset transfers may require more third party consents since the contract may contain a clause that prohibits or restricts transfers. When stock or membership units are purchased, this assignment is not usually needed.
Tax issues are complicated and are important to consider when considering which option to select. You should sit down with a tax professional to review these options as tax is an important part of any structure. This should be done before you buy. There are various factors that implicate tax issues including, the use of cash for the purchase, the use of a promissory note for the purchase, intellectual property, the timing of the consideration transfers, whether the payment is made using cash, stock or another type of payment and other factors. The tax interests of the parties may differ and this is all the more reason to seek competent tax counsel when entering in to these transactions.
Third party and corporate consent & SEC considerations
A number of consents and approvals may be required for an asset purchase. These generally fall into 3 categories:
- Approvals required by a party’s organizational documents (for example, the certificate of incorporation or LLC and the laws of the state of such party’s formation).
- Approvals required by statute and other regulations.
- Contractual consents relating to the assets themselves, for example assignment provisions.
As described above, assets sales can trigger some third party consents related to assignments and in other areas. For the sale of stock or membership units, corporate and/or other board approvals may also be needed and the specific requirements are usually defined in either the shareholder’s agreement or the operating agreement. If assets are sold though, the sale generally does not trigger SEC scrutiny or compliance implications as securities are not being sold. If membership units or stock is sold, then the seller must comply with SEC requirements and either register the securities or find an appropriate exemption. You can find out more about SEC requirements and Regulation D, and Rule 506 exemptions by clicking here.
These are just some of the considerations when deciding on whether to purchase assets or purchase the membership units or stock. It is essential to find a qualified attorney to guide you through the process. Once a decision has been made, the term sheet and purchase and sale agreement can be drafted. You can find out more about the purchase and sale agreement by clicking here.
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