Buying or Selling a Business? A Guide to the Different Forms the Transaction Could Take
When deciding to sell your company, there are a number of different ways it can be accomplished. A lot of the decision can stem from the type of entity you originally created. Did you set up a corporation that issued stock to individuals? Perhaps you decided to create a limited liability company with membership units representing ownership interests. If you were a small start up, its possible you operated as a sole proprietorship. The type of entity being sold and tax or liability concerns associated with that choice are important. Assuming that your potential Buyer has completed their Due Diligence and found things acceptable, the next step in the process may be deciding on what form the transaction will require. This article is not intended to hit upon the tax consequences associated with the sale of a business. For that, you must consult a qualified tax professional. Instead, we want to take a short time to look briefly at several different forms of sale transactions and specifically the advantages and disadvantages between a “Merger”, an “Asset Sale”, and a “Stock Sale”.
Merger: In its simplest terms, a merger involves two different companies literally combining into one single company. In the most common type of merger, the buyer will create a new wholly-owned subsidiary company that will merge directly into your company, with the merger sub disappearing as a distinct legal entity following completion of the merger. The result will be that the buyer owns 100% of the merged company (which from a legal standpoint is your original company and the selling stockholders receive a deal payment. A merger can be complicated as it often requires the creation of a merger sub and the filing of merger plans and certificates with state authorities. Additionally, some types of mergers result in your company’s disappearance as a distinct legal entity which can trigger certain provisions (such as anti-assignment provisions) in contracts your company may have entered into.
Asset Sale: In this type of structured sale, the buyer typically buys selected assets from your company, but may not assume any or all of the liabilities associated with your company. Unless those liabilities are expressly assumed by the buyer, they will continue to exist and remain with your company, which will continue to exist. From a buyer’s perspective, being able to pick and choose exactly which assets it wants is a desirable form of transaction, while leaving behind unwanted assets and liabilities (both known and unknown). There may be issues however with certain intellectual property rights that are spread over several lines of business. Additionally, the concepts of “successor liability” and fraudulent conveyance” somewhat limits the ability of a buyer to leave behind or otherwise insulate itself from unwanted liabilities in your company.
Stock Sale: This is a fairly straight forward approach where the buyer simply purchases the outstanding stock of your company directly from the shareholders. The name of your company, operations, contracts, etc., all remain in place, but with new ownership. If there are a small number of shareholders operating in unison, this may be a preferred form of transaction. With a large and diverse stockholder base, it is not assumed that all of the stockholders will actually agree to sell their shares, and a few buyers may be looking to purchase less than 100% of your company. Therefore, unless your company is closely held and you are confident that you can get all of the shareholders to agree to sell their stock, this might not be the preferable course to take.
Choosing a transaction structure to sell your company is an important decision, and understanding the pros and cons of your alternatives is important. While this article provides only a brief overview and is by no means exhaustive, it should give you a starting point in making your decision to sell your company a bit clearer.
With over 30 years’ experience in advising businesses, let Boznos Law work with you to ensure you are ready to meet the challenges posed by the business environment. Call Bill Boznos today at (630) 375-1958 or contact us at www.boznoslawoffice.com/contact-us through our website.
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