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Asset Purchase vs Stock Purchase: How To Buy A Company

By Business Contracts, Business Lawyer

Asset Purchase vs Stock Purchase: How To Buy A CompanyWhen 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).

Sweat Equity: How to Trade Your Services for Business Ownership

By Internet Lawyer, Website Lawyer, Website Legal Documents

sweat equityIf you’re looking for multiple streams of income to support you, trading your services in exchange for sweat equity in Internet startups is one way to accomplish your goal.

From computer programming to search engine marketing, the possibilities are endless if you have a skill set that others want to use.

How do you trade your skills for business equity?

Typically, you’ll want to a hybrid package of compensation where you’re paid a portion in money and the balance for your services in equity consisting of corporate stock or LLC membership interests.

How much sweat equity should you receive when you barter your services?

That depends upon what you bring to the table and how much your client needs your services.

Which Internet startups are most receptive to giving you equity in exchange for services?

Small ecommerce businesses and startups that aren’t funded by venture capitalists or angel investors are your best bets for cutting a deal where you end up with partial ownership of the company by providing services.

However, it’s important to carefully evaluate these companies carefully because of high failure rates and the dishonesty of some entrepreneurs.

Should you trade your services solely for sweat equity?

It rarely makes sense to provide services only for equity. Most companies will not become the next Google or Amazon.

This means you’ll still want to generate some money on the front end to support yourself and consider the equity essentially a bonus if it pays off for you later.

Equally important, the client who insists that you trade your services solely for equity likely is broke and has a bad business model that will fail, leaving you with nothing to show for your hard work.

What about bartering services in exchange for payment over time by an Internet startup instead of equity?

In some limited circumstances it may make sense to accept partial payment now and becoming a long-term creditor of your client for the balance due for your services. This is different than the common practice of getting paid in installments based upon completion of certain milestones during a project.

As a practical matter, you’ll want to make sure you’re getting paid over the long term and there’s security in place to protect you in case the client defaults.

Whether you’re trading services for sweat equity or becoming a creditor by accepting payments over time, your Internet lawyer can draft the right legal documents to protect your interests so that you get the best deal possible. Remember, that if an agreement isn’t in writing, chances are you’re going to get screwed even if your client has the best of intentions.

To speak with Internet Lawyer Mike Young, the first thing to do is schedule a telephone consultation.