When you’re looking to buy a privately held company, you’ll want to decide which makes sense from a financial and legal perspective – asset purchase vs stock purchase (a.k.a. equity purchase).*
There’s no clear cut answer to this question because each deal has unique issues.
However, there are key factors to take into account when making this decision so that you can weigh the pros and cons of each method of business acquisition.
Deal Speed and Assumption of Liabilities
Although there can be steps to minimize the risks of unidentified liabilities, as a general rule of thumb it’s quicker to buy a company’s equity but you’re more likely to assume responsibility for outstanding liabilities in the process (e.g. outstanding legal claims that haven’t matured into a lawsuit prior to acquisition).
On the flip side, an asset purchase (e.g. buying some or all of the company’s assets for a new or existing entity you own) reduces liability exposure for what the seller did or did not do while running the business using those assets.
The AWOL Equity Owners
In many deals, it’s not possible to purchase all of a company’s equity because some of the owners are unavailable to sell (e.g. missing heirs of a deceased stock owner), lack of the ability to sell (e.g. an equity owner has dementia without designating a power of attorney), or one of the owners is being obstinate (e.g. community property stock where the spouses are going through divorce).
In situations like these, if a deal is to occur, chances are an asset purchase will be easier to do than buying the company’s stock.
Cherry Picking Assets
Often there as situations where a privately held company has assets that are uniquely beneficial to the selling equity owners. For example, the company may own the building in which it operates but the prospective buyer wants to relocate the business to another state or country. It’s also common for a company to own vehicles and computer equipment that the seller wants to keep as part of deal.
In these scenarios, you’ll want to see if it makes sense to simply purchase the assets you do want for running the business while leaving the rest in the selling company. However, if an equity deal makes the most sense, you may want purchase the company’s stock and then have the company sell the assets it doesn’t want to the selling equity owners who want to retain the assets for their own use.
Who Can Help You Make an Asset Purchase vs Stock Purchase Decision?
When deciding how to structure a potential deal (asset purchase vs stock purchase), you’ll want to talk with both an experienced business contracts attorney for the legal issues (and preparation of the related acquisition documents) and your certified public accountant (CPA) about the tax implications of each type of purchase. If commercial real estate is being acquired as part of the transaction, your business attorney may bring in a qualified real estate lawyer to handle that aspect of the deal.
Related Article: Outside General Counsel – When Should Your Business Retain One?
To speak with Business Attorney Mike Young about buying a privately held company, set up a phone consultation today.
* Note – although this article refers to a corporate stock purchase, as a practical matter the issues identified arise in other equity purchases (e.g. buying limited liability company (LLC) membership interests).