There are many factors that must be considered when selling or purchasing a business including whether the deal should be structured as an asset purchase, a stock purchase, or an equity purchase. One must also consider the tax implications of the sale or acquisition of a business.
The Letter of Intent.
The process of a merger or acquisition almost always begins with a letter of intent (commonly referred to as an “LOI”) or a term sheet, which is a more abbreviated version of an LOI that concisely states the terms the parties are willing to agree to in a potential sale of a business or merger or acquisition of a business. The successful negotiation of a business sale, a merger, or acquisition begins with a well-planned and drafted LOI or term sheet.
The goal of an LOI is to illustrate the landscape of the deal by describing the structure of the proposed transaction and the essential terms of the transaction, and most importantly, the proposed purchase price. Most often, the LOI is prepared to be non-binding as to the terms of the proposed business sale, merger or acquisition, but contains certain binding terms that assist in facilitating the good faith negotiation of an agreement between the seller and buyer of the business. These binding terms commonly include the requirement that the parties negotiate in good faith with one another, that the parties will not entertain other offers from third parties, and a date by which the parties will enter into a binding agreement or walk away from the transaction. The successful negotiation of the language in a LOI sets the tone for the negotiation of the asset purchase agreement, stock purchase agreement, or equity purchase agreement that is the binding contract between the parties to the transaction. Sometimes, the parties opt to utilize a term sheet instead of an LOI. A term sheet provides a simplified statement (or table) showing the essential terms to which each party would be willing to agree in a subsequent formal agreement governing the sale, merger or acquisition of the business.
The Purchase Agreement.
The structure of the proposed transaction is the greatest overarching consideration that must be decided when selling or purchasing a business. As a buyer of a business, it is often most advantageous to structure an acquisition as an asset sale. This is accomplished by way of an Asset Purchase Agreement. The primary reason that buyers prefer this form of business sale is that the buyer wishes to avoid any pre-existing liabilities of the business that would come with purchasing the stock or ownership interest in the business. It is important to remember that not only tangible physical assets can be sold, but also intangible assets such as trademarks, business names, phone numbers, websites, and goodwill. There are also tax considerations that come into play. With an asset sale structure, the parties have a great deal of control over the allocation of the purchase price over the various classes of assets for tax purposes. This often works more to the benefit of the purchaser than the seller because the seller will be required to pay capital gains tax based on its adjusted basis in each asset.
As a seller of a business, it is often preferable to structure the transaction as a stock sale or equity sale. This form of transaction is accomplished by way of a stock purchase agreement or equity purchase agreement. In this form of transaction, the liabilities of the business will come with the stock that is purchased, unless the parties agree otherwise. Generally, the capital gains tax that the seller will have to pay is determined by the basis that the shareholder(s) or members have in the stock (or membership interest if an LLC). Nevertheless, there are a myriad of provisions that are negotiated in each asset purchase agreement or stock purchase agreement such as indemnity escrows, baskets, and earnouts, all of which have a bearing on the ultimate purchase price of the business and the parties’ obligations to one another following the closing of the sale.
If you are contemplating the sale, merger, or acquisition of a business call Darald J. Schaffer to set up a consultation to learn how he can help you navigate the process.
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