What is the difference between a stock purchase and an asset purchase as a mergers and acquisitions strategy? How can a stock purchase agreement protect your business interests while allowing you to acquire the company or business you intend to buy? What are the perspectives of the “buyer” and the “seller” in these transactions?
The advantage of a stock purchase is it transfers ownership or controlling interest in a company from the seller to the buyer. You don’t have to go to the time and expense of creating separate UCC agreements or descriptions of individual assets, or negotiate with creditors to release encumbrances. The seller may enjoy a lower tax rate on the proceeds of the sale and has an incentive to ensure a smooth transition to the buyer’s management team. There are definitely issues relating to outstanding loans and liabilities, as well as future disputes and contingent liabilities that may be unforeseeable at this point. There are risks associated with employees, product liabilities, customer transition and all outstanding financial debts and obligations. A well crafted stock purchase contract agreement should balance the desires of the seller to close the transaction and move on, with the risks assumed by the buyer and the ability to lay unforeseen costs and liabilities back upon the seller prior to final reconciliation.
The buyer should be concerned with these present and future risks and liabilities. There should also be a careful analysis of the transaction from a tax perspective to ensure the “basis” for the new acquisition will not be stepped up to an unmanageable level. There may be specific governmental or other contracts that the buyer wishes to preserve. The stock purchase allows the buyer to “step into the shoes” of the seller preserving all existing relationships, contracts and hopefully the book of business itself. There are issues concerning the seller’s impact on Goodwill and there is usually a transition period where the seller remains somewhat active in the ongoing operations of the business. This is phased out over a specified period of time where the transaction is ultimately concluded and final accounting is completed.
If you are considering a stock purchase, merger or acquisition it is important to make sure you understand all implications of the transaction. How can a stock purchase agreement protect your business interests and ensure you achieve the desired outcome? We invite you to contact the Watkins Firm for a free consultation at 858-535-1511.