Is a stock purchase better than an asset purchase as a mergers and acquisitions strategy in San Diego and Southern California?  When should you consider a stock purchase and why is an asset purchase used 10 to 1 over a stock purchase?

When is a Stock Purchase Better Than an Asset Purchase?

When is a stock purchase better than an asset purchase?  The primary advantage of a stock purchase agreement is that the transaction allows you to take controlling interest or buy an entire corporation.  You, as the buyer, are stepping into the shoes of the seller under in the eyes of the law.

There are times when you want absolute control of a corporation, without disrupting the existing employee workforce or the delicate relationships with existing contracts or customers.  You may be concerned about military contracts, or the preservation of registered trademarks, patents, copyrights or other intellectual property.  A stock purchase agreement allows you to “step into the shoes” of an existing controlling interest in a corporation.  In some cases, the company isn’t even aware that an ownership change has occurred.  However, in most cases it is important to keep existing management and key personnel in place to ensure continuation of profitable business and relationships.

It is also often necessary to ensure that the seller maintains “skin in the game” after the sale is completed to ensure transfer of goodwill to the buyer.  This is often accomplished through a “consultant” arrangement or other temporary service contract.  It allows for a period of time to pass after the transaction when actual performance can be compared against pre-sale positions represented by the buyer.  It also allows a period of time for unforeseeable contingent liabilities to surface and for any appropriate amount to be offset from the seller’s proceeds in the stock purchase transaction.

This is obviously not an option for an LLC as there is no “stock” in this form of business entity.

When is an Asset Purchase Better than a Stock Purchase?

The primary drawback to a stock purchase when compared to an asset purchase is the extent of the buyer’s contingent liability.  The experienced mergers and acquisitions attorneys at the Watkins Firm have served the San Diego business community for more than four decades.  We understand the complex nature of purchasing a corporation and/or it’s assets and how to protect our clients during a stock purchase transaction.

The primary advantage of an asset purchase is it is much more straight forward.  The buyer is purchasing specific business asset(s) while presumably avoiding most if not all contingent liabilities.  The primary concerns of the buyer are clear, unencumbered title, a thorough understanding of the condition of the asset(s) to be acquired and the ability of the seller to convey the business assets associated with the transaction.

This is the preferred method of acquiring a variety of business assets including, but not limited to customers, inventory, equipment, real estate, intellectual property, licenses, trade secrets, and even accounts payable and/or receivable.  The terms of the contract must be clearly and carefully constructed to protect both the buyer and the seller.

Asset purchase transactions may involve the interests of minority shareholders as well as creditors and those who may hold a secured interest in the assets to be acquired.

The Watkins Firm has 40+ Years of Experience in Thousands of Mergers and Acquisitions Transactions

The Watkins Firm has 40+ years of experience in thousands of asset purchase, stock purchase, mergers and acquisition transactions.  We maintain a proprietary library of proven, battle-tested contracts and due diligence checklists.

Is a stock purchase better than an asset purchase?  Would an asset purchase be the best strategy to accomplish your objectives?  Our experienced, proven mergers and acquisition attorneys can help you to know how to structure the transaction to acquire the business assets you require.

If you are considering a stock purchase or asset purchase transaction we invite you to review our podcast Episode 13 – Mergers and Acquisitions as well as the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.