Buying or Selling a Business
For those of you thinking of buying or selling a business, one of the decisions you will have to make is how to structure the transaction. The following article discusses the differences between an asset sale and the sale of equity. Special thanks to Tyler Wetering, one of our business and estate planning lawyers at GPNA, for helping me put this article together.
Generally, in an asset sale, the seller retains its ownership interest in the entity selling the assets, while the buyer acquires the individual assets of the selling company. These assets may include only a portion of the selling company's business, or possibly the entire business. The assets purchased typically include such things as equipment, furniture, fixtures, leasehold improvements, inventory, existing contracts, licenses, leases, trade names, telephone numbers, domain names, and sometimes even the goodwill of the business as a going concern. The transfer of the assets of a business typically requires additional transfer documents, such as bills of sale or assignment documents.
In most circumstances, a buyer will prefer an asset purchase to avoid assuming the liabilities of the selling company; however, in certain situations, the assets being acquired may be hard to transfer due to issues of assignability, legal ownership, or third-party consent requirements (these types of assets typically include contracts, leases, and certain permits). These types of assets may necessitate the purchase being structured as a sale of equity interest rather than a sale of assets.
Sale of Stock or Equity Interest
In a sale of stock or other equity interests (such as LLC interests or partnership interests), the buyer acquires the stock or equity interest in the company directly from the seller (and thereby obtains ownership of the business entity along with all of its assets). Typically, the buyer will acquire all of the assets and liabilities of the company being purchased through the acquisition of the ownership interest in the company; however, assets and liabilities that the buyer does not want to acquire are sometimes distributed or paid off prior to the sale.
Unlike an asset sale, a sale of stock (or other equity interests) does not require the separate conveyance of each individual asset because the title of each asset lies with the company being acquired. The buyer inherits significantly more risk, however, by purchasing the ownership interest in the company (including risks that may be unknown at the time of the sale such as future lawsuits). A buyer’s potential risk can be reduced through representations, warranties, and indemnifications from the seller. Despite this risk (and as discussed above), if the company has assets that are difficult to transfer or assign, the buyer may choose to acquire the equity interests of the company in order to acquire its assets. In addition, if the company’s business is dependent on a few large vendors or customers, the acquisition of the company as a going concern (rather than just its assets) may reduce the risk of losing these contracts. Further certain contracts, such as leases, may provide more favorable terms than they would if they were to be re-negotiated by the purchaser of a company’s assets.
In addition to some of the legal considerations set forth above, whether a sale is structured as a sale of equity interests versus an asset sale can have drastically different tax consequences for the parties involved which necessitate consultation with an accountant prior to making a determination on how the sale should be structured. Once the structure of a sale is determined, it is critical that the parties to the transaction memorialize the terms of the transaction in writing in a purchase agreement (either an asset purchase agreement (APA) for the purchase of assets, or a stock purchase agreement (SPA) for the purchase of stock).
As with any transaction, the potential impact of a sale of equity interests versus an asset sale should be carefully considered and discussed with the business’s accountant and attorney before either type of purchase or sale is pursued by a business owner.
Jason M. Smiley
Jason Smiley is a partner of Gunderson, Palmer, Nelson & Ashmore, LLP, and a member of the firm’s Executive Committee. He focuses his practice on Construction Law, Real Estate, Civil Litigation, and Insurance Defense. Jason understands that each client’s concerns and objectives are unique.
Tyler C. Wetering
Tyler C. Wetering is a partner with Gunderson, Palmer, Nelson & Ashmore, LLP and is a member of the firm's Business Transactions & Estate Planning group. Tyler has served as the past chair of the Real Property, Probate, and Trust Section of the South Dakota Bar and has also served on the board of the West River Estate & Financial Planning Council.