Buying a business, big or small, is not necessarily simple. Generally speaking, there are two types of sales: a purchase of a company’s assets or a purchase of a company’s stock.
An asset purchase occurs when potential buyers select and purchase certain assets, such as a business’s inventory, trade secrets, confidential information, client lists, office spaces, and/or other defined assets that are being sold and that the sellers owned previously; however, buyers do not purchase the sellers’ business itself. As a result, potential buyers may decline to purchase assets and related responsibilities they do not wish to purchase or the sellers do not wish to sell. Usually, except for assets to be sold and that are then used as security or collateral to a third party (such as a lender), the ownership of the assets is transferred from seller to buyer. In an Asset Purchase Agreement, sellers and buyers laboriously specify the assets to be sold, may pay title transfer taxes, and enter into a binding contract. However, some contracts are subject to third party approval and consent before the sale is allowed to occur.
Conversely, a stock purchase occurs when potential buyers purchase stock, or ownership, of a business entity. As a result, a purchase of all the stock or a purchase of a majority of the stock may provide sellers with opportunities to step away from their business; potential buyers would be filling the sellers’ shoes and assuming most responsibilities regarding old and new business operations, liabilities, and obligations. Moreover, a stock purchase involves potential buyers purchasing shares or stock of a corporation. If the seller agrees, a buyer may buy all the stock in a corporation or only a portion.
Valuation, or the amount of money involved in the transaction, is key in determining whether the seller is selling assets or stock. In either transaction, due diligence is the norm. Buyers wish to know what they are purchasing, and sellers wish to know if the buyer can follow through and actually make the purchase. Due diligence and carefully drafting contracts (and related documents) can help both parties avoid misunderstandings and prevent lawsuits if one party believes that he or she has been cheated, misled, or defrauded. Regardless of the type of transaction, there may be tax consequences for sellers and/or purchasers.
Remember: In an asset purchase, buyers purchase particular assets from the sellers, and in a stock purchase buyers purchase stock from the shareholders who are selling their shares.
In any event, before selling or buying a business, talk to a lawyer and a tax adviser. If you own and/or manage a business and you are thinking about buying or selling assets, stocks, or combinations thereof, first consult with a lawyer. For more information, contact Nashville Business Attorney Perry A. Craft.