Business Acquisitions and Sales
7 Basic Steps of a Business Acquisition or Sale
- Prepare your business for sale (if you are the seller) or research a business to purchase (if you are the buyer).
- Find a buyer or a seller.
- Negotiate the terms of the transaction and execute a Letter of Intent.
- Conduct Due Diligence.
- Negotiate and execute a Purchase Agreement.
- Post-Closing transition.
Anyone with any degree of experience in business acquisitions will highly recommend you hire an attorney at the very beginning of the process. These transactions involve many legal elements, such as business structure, tax, real estate, contracts, finance, and employment. Very often, we see people wait to hire an attorney until the end of the process, and it is often necessary to go back and redo negotiations or due diligence.
2 Ways to Structure the Transaction
- Asset Purchase.
- Stock Purchase.
Every business acquisition comes in the form of either an asset purchase or a stock purchase. The buyer and seller must decide which structure is most appropriate for that particular transaction. Only an attorney should advise the buyer or seller on these issues. Non-attorney professionals such as accountants and business brokers are not legally permitted to give advice on these issues. However, we are accustomed to working closely with a client's entire team of advisors to ensure a smooth transaction.
Asset Purchase: In an asset purchase transaction, the seller (LLC or corporation) sells essentially all of its assets to the buyer. The buyer is a separate LLC or corporation that purchases the seller's assets. The transaction typically includes the seller's intangible assets such as the phone number, website, logos, and trade names. Therefore, the customers do not notice the transition from one owner to another.
Buyers typically prefer to structure the transaction as an asset purchase for liability reasons and tax reasons. Regarding liability, if the buyer is a separate LLC or corporation, it is less likely the buyer could be held liable for something the seller might have done prior to closing. Regarding taxes, the buyer can establish a higher tax basis in the purchased assets and reset the depreciation schedule on those assets.
Stock Purchase: In a stock purchase transaction, the individual LLC member or corporate shareholder sells their ownership equity in the business to other another individual. The buyer then becomes the owner of the business, which gives them control over all the assets of the business.
Sellers typically prefer to structure the transaction as a stock purchase for tax reasons and because it simplifies the transaction. Regarding taxes, the seller's tax on selling an ownership interest in a business is typically less than the tax when selling the assets of a business. Regarding simplicity, in an asset purchase, the seller still owns an LLC or corporation that must be dissolved at some point. That step is eliminated in a stock purchase.
Hurley Law has experience representing buyers and sellers, in both asset purchases and stock purchases, across a wide range of industries. We would be happy to meet or talk by phone to discuss how we can help you.