Acquisitions are generally accomplished in one of two ways: purchase of the business and assets of a company or purchase of the company stock. Purchase of the business and assets has one advantage: the buyer knows the liabilities that will accompany the purchase. Those liabilities not assumed remain with the seller. Thus in an asset deal, the buyer is not at risk with respect to liabilities that don’t surface, such as tax claims, tort claims, whether they were overlooked or not disclosed. In a stock acquisition, though the buyer takes the company as is and must rely on the seller’s warranties and its won investigation to be sure that “as is” equals “as expected.” And, in this respect, sellers always want to limit their exposure to liabilities on warranties.
The asset deal, though is generally more complex, often involving the transfer of title to many different kinds of property: goodwill, real estate, patents, copyrights, and trademarks, inventory, machinery and equipment; furniture and fixtures; contracts; and accounts receivable. Sales and transfer taxes are usually involved, and consents from other parties to contracts are often required to transfer them to the buyer.
In addition to the foregoing considerations, the income tax consequences to the buyer and seller will vary depending on whether stock or assets are purchased. These tax consequences will often have an impact on the purchase price. Tax advice, therefore, should be obtained whenever a company is being sold or acquired.
The seller’s warranties comprise a substantial portion of the agreement and are usually the most important and most negotiated terms. The purpose of the warranties is to give the buyer a map of the company. Because the asset deal minimizes the buyer’s exposur4e to liabilities, it is usually easier to negotiate the warranties in an asset transaction. But there is not set formula. Each deal has its own peculiarities.
I prefer drafting simultaneous closings because the transaction is simpler to draft. That is when the deal is signed and closed on the same day. Another reason that I prefer simultaneous closings is that if one or more closing requirement is not met, the risk of a lawsuit is minimized, if not eliminated.
Sometimes the transaction requires adjustments to the purchase price (up or down) based on changes occurring between the signing of the contract and the closing. This mostly occurs when the period between contract and closing is long. It also is more frequent in asset transactions. This is related to the normal fluctuations in running a going concern business. The company is receiving inventory, selling parts, making sales.
The acquisition agreement is usually prepared by the attorney for the buyer. Nothing is signed, except the letter of intent and a confidentiality letter, until the formal contracts are signed. This procedure speeds the process, as it can take almost as long to negotiate a letter of intent as it can to negotiate a contract.
Another advantage of an asset purchase is your ability to allocate the purchase price to the assets acquired. This lets you revalue the assets and deduct them over their useful life. In contrast if you pay more than book value for his interest you cannot revalue the assets and deduct the premium paid. Instead you would be limited to deducting the interest when you sold the business. The asset acquisition is likely to be more beneficial.