The purchase of an existing, on-going business may be typically structured in one of three different ways:
1.a merger of the two businesses;
2. a stock purchase (or a membership interest purchase if the entity is an LLC); or
3. an asset purchase. The basic form or structure of the transaction must be determined very early in the negotiations, and only after you have received counsel from (a) your certified public accountant; (b) a business valuation analyst; and (c) your attorney. Often the parties will desire to summarize their preliminary understanding with a negotiated letter of intent.
The structure of a business acquisition may be compelled by a number of matters, for example, the seller’s known, unknown, and contingent liabilities; or the seller’s tax position in a major asset; or sales price financing issues; or required consents and approvals. For the smaller business, more often than not the buyer’s tax and legal professionals will encourage the buyer to structure the acquisition as an asset purchase to avoid or limit issues relating to the assumption of seller’s liabilities (disclosed, undisclosed, and contingent).
Asset purchase agreements are often very complex because of the buyer’s numerous concerns, for example: the sales price, payment or financing of the sales price, defining the assets which will be purchased, identifying proprietary information and intellectual property to be purchased (including the seller’s business name or trade name), seller’s liabilities assumed, seller’s liabilities not assumed, inventories of assets and inventory, closing date, seller’s representations and warranties to the buyer, seller’s indemnification of the buyer, covenants not to compete, post-closing cooperation by seller, conditions that must be fulfilled before buyer is obligated to purchase, and risk of loss for a casualty or catastrophe that occurs before the closing. And all of these maters must be addressed so that the buyer clearly understands both the upside and the downside of the transaction. Normally the buyer will make an offer to purchase in the form of an asset purchase agreement which is prepared by the buyer’s counsel.
I assist both the sellers of businesses and the buyers of businesses in the negotiation and preparation of asset purchase agreements.