From the seller’s standpoint, the sale of a business is one of the most consequential events in the life of the business. Many times the seller has spent years building the business and, quite understandably, has a strong emotional attachment to his or her creation. On the other hand, a purchaser of a business generally either views the transaction as a way to enter into a new industry or a way to build an ongoing business.
There are many ways that a sale of a business may be structured, but they are all variations on three (3) general themes:
- The sale of stock
- The sale of assets
- A merger transaction.
Sale of Stock.
Sellers generally prefer to structure a transaction as a sale of stock, because in that structure, the purchaser is buying the company itself and will be acquiring all of its assets as well as all of its liabilities. In addition, the seller will receive capital gains treatment for the sale of stock, which could reduce the Seller’s tax liability.
On the other hand, from a buyer’s perspective, when he purchases the business through a stock purchase, the purchaser acquires all the liabilities of the corporation, even those that may be unknown at the time. This adds a lot of uncertainty to the transaction. On the positive side, the purchaser acquires all of the assets of the seller, including unassignable contracts, permits and licenses, without having to obtain the consent of the other party to the contract. This can be a significant benefit to the purchaser in certain circumstances where these types of contracts are central to the business and they are unassignable. For example, in a stock purchase, the purchaser obtains all intellectual property such as patents and trademarks without having those assets specifically transferred, and the purchaser receives contracts such as leases without the consent of the other party, in most cases.
Asset Sale.
Asset sales are generally favored by purchasers, because the purchaser is getting specific assets of the company, and the purchaser only assumes specific liabilities of the company which the purchaser chooses to assume. Thus, the purchaser is able to “cherry pick” the assets it desires, and it is able to avoid liabilities, which may or may not be known.
From a seller’s standpoint, the sale of assets is more complicated, because each asset has to be re-titled in the name of the buyer. This is not required in a stock purchase. In addition, the seller has to negotiate over each asset and liability being transferred. Also, the seller may be left with certain assets for which it has no use. In that case, the seller would be in a position of having to sell off those assets to another party. This case be difficult and it adds uncertainty to the transaction.
Merger
The third basic alternative for structuring the sale of business is through the mechanism of a merger. A merger is fundamentally different from the sale of a business through an asset sale or stock sale, because generally the seller receives the stock of the purchaser, and in many cases the seller is asked to stay on and run the business. Thus, the seller continues to be tied to the business either as an operator or as owner going forward. There are variations on this theme, and the seller is not always asked to remain with the business, but in any event the seller will continue to be tied to the success of the business as compared to a sale of assets or a sale of stock, which effectively terminates the seller’s connection with the business going forward.
In a typical merger transaction, the stock of the purchaser is exchanged for the stock of the seller, so after the transaction, the selling corporation can become a subsidiary of the purchaser or it can be completely absorbed by the purchaser. In any event, the shareholders of the seller now become shareholders of the purchaser.
One of the benefits of a merger is that it can be completely tax free or it can be partially tax free or entirely taxable to the seller depending on the structure of the transaction. As a result, mergers are driven by the tax implications of the transaction more so than a sale of stock or assets. In a merger, there are many other strategic implications such as the vision of the purchaser going forward on a post-merger basis. The seller may or may not agree with this vision and therefore, it is important that strategic objectives be balanced against the tax consequences in order to have a successful merger.
In addition to the three (3) options discussed above, there are other strategic alternatives that may be available in structuring the sale of a business, for example, the development of a partnership or a joint venture. However, the three (3) alternatives discussed above, generally provide the basis for the sale of most businesses, although there are an infinite number of variations used to accomplish the goals of the buying and selling parties. For this reason, it is crucial for the buyer and seller to have experienced legal counsel to advise them on the best structure to meet their particular goals and to minimize the tax implications and the risks of the transaction.
This article is not intended to be an in-depth discussion of the issues presented, but is only an overview of the structural options available to a seller or buyer of a business. For this reason, it is limited in its scope. However, I intend to provide subsequent articles that will discuss each of these options and their advantages and disadvantages in more detail. So stay tuned.
Richard W. Jones is an Atlanta business lawyer and an Atlanta securities lawyer with the Atlanta, Georgia law firm of Jones & Haley, P.C. He has over 30 years experience representing clients in securities and corporate matters. Please see our website at http://www.corplaw.net/.
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