Is an asset purchase a better option than a stock purchase here in San Diego and throughout California? An asset purchase agreement can be a better strategy than a stock purchase in some mergers and acquisitions scenarios.
Key Takeaways of Is an Asset Purchase a Better Option Than a Stock Purchase:
- An asset purchase transaction allows your company to buy the vehicles, real estate, manufacturing equipment, customer bases or other assets of a competitor or national corporation, without assuming the risks and contingent liabilities required in a stock purchase.
- A stock purchase is used to acquire a company or business entity itself, but they also require you to accept responsibility for a corporation’s debts and any contingent liability that may be in existence.
- When is an asset purchase a better option than a stock purchase, and vice versa?
What Does an Asset Purchase Transaction Accomplish?
The advantage of an asset purchase agreement is simple: you buy specific assets and limit your exposure to liability. An asset purchase transaction allows your company to buy the vehicles, real estate, manufacturing equipment, customer bases or other assets of a competitor or national corporation, without assuming the risks and contingent liabilities required in a stock purchase.
An effective asset purchase agreement must clearly describe the item(s) to be conveyed as part of the agreement, as well as a substantial description and statement of condition. The seller should disclose all known defects, problems or challenges associated with each asset to be purchased. In addition, due diligence should be carefully undertaken to ensure there are no other financial encumbrances which would remain attached to the asset while ensuring the seller has the clear right to provide clear title to the buyer. These situations make an asset purchase better than a stock purchase.
The attorneys at the Watkins Firm have decades of expertise and experience structuring mergers and acquisitions. We help our clients to achieve the growth they desire without exposing themselves needlessly to unnecessary risk or contingent liabilities. Our asset purchase agreement will ensure that you receive clear title to the specific assets you wish to acquire without exposing yourself or your company to the liabilities of the seller, and any lawsuits they may be facing.
When the Purchase of a Company Itself may be Necessary or Required
Stock purchase strategies are used to acquire a company or business entity itself, but they also require you to accept responsibility for a corporation’s debts and any contingent liability that may be in existence. There are times where this may be required, such as deals that involve government contracts or intellectual property. Issues with existing creditors can complicate the transaction of a company’s assets. Stock purchase transactions are generally better for the seller from a taxation and liability point of view.
Stock purchase transactions can also help to “mask” the acquisition in the marketplace and even with customers and employees. The due diligence associated with a stock purchase is much more legally and financially complex than an asset purchase.
Pro-Tip: “What are some of the key aspects of an APA (Asset Purchase Agreement) transaction. You’re transferring title to an asset. The reason you want to do an asset purchase is because you intend to buy the actual assets that are being described, and they’re being sold to you in a manner where you don’t have to worry about all the other problems or secrets this corporation and its shareholders may have. An asset purchase, will often entail an escrow.
We help to create an escrow for the transaction, and send out a notice that you have bought a company’s assets. And if you’re a creditor, you have 60 days to come and make a claim. Otherwise, after that you’ll own not only the equipment, you’ll own any associated Goodwill, own the name, the IP, every asset associated with the transaction free and clear.
What happens when an asset is encumbered? Is it the responsibility of the seller to disclose that? And how do you handle transactions when there are UCCS and encumbrances against an asset?
This is quite common. We’ve done literally thousands and thousands of these transactions. When that happens, you provide for what we call ‘carve outs’ or clauses in the agreement where the money comes in, goes into an escrow account, whether it’s our trust account or an actual commercial escrow company, like Chicago Title of First American Title. And then you put escrow instructions in and say, ‘okay, when the money comes in, the escrow, officer is instructed to pay off this creditor or that creditor, or you also have a carve out, and/or you’ll enter into a new agreement with the vendors or the creditors to keep doing business with them. So all those types of things are included when you do an asset purchase.
In each of these transactions, the buyer and the seller each have advantages and disadvantages. It’s harder to be a buyer. It’s easy to be a seller. A buyer has the harder task because the buyer gives money and the buyer has to verify what they’re acquiring. And that’s when we come up with a term called schedules, depending on how expensive or large a transaction is, you’re going to have more schedules (if you’re represented by an experienced Watkins Firm APA and M&A attorney).
We have a proprietary library of proven transaction schedules and documents we custom tailor to the transaction at hand in order to organize and identify the assets within the transaction at hand. For example, you have your real estate schedules, you’ll have a disclosure by the seller of what they own and all the contracts they’ve signed with respect to real estate. You’ll have equipment schedules, and all transaction assets will be listed, and and the seller will have to provide full, accurate disclosures. We account for cash value, and you’ll have accounts and good will and taxes and all the things that you want to do as a buyer in an organized fashion to review a) to make sure you know what you’re getting and b) to make sure you get representations from the seller that this is what (the seller is) giving you in case later on, it turns out they weren’t telling the truth.” – Dan Watkins, Founding Partner
Is an Asset Purchase Better Than a Stock Purchase – How Will You Know
When is an asset purchase a better option than a stock purchase in California, and vice versa? How will you know? This is why it is important to work with Watkins Firm’s business and mergers and acquisitions attorneys with more than four decades of experience. We provide sound insight and guidance to help our clients make the best decisions for their company now and in the future.
If you are interested in acquiring a competitor, or perhaps purchasing part of a major corporation that is no longer in harmony with their primary business goals 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.
Meet Daniel Watkins:
Daniel W. Watkins is a true people person who sincerely listens. He cares deeply about what others are going through. Dan enjoys digging into the facts and finding creative solutions to problems. He contributes his insights candidly and constructively.
Dan’s interest in people make him deeply invested in every relationship and his exuberant personality makes him a true litigator. Dan fights for his clients with a fierce and calculated commitment.
Dan has practiced in the areas of business, medical practices and healthcare business, high tech/science, real estate and employment defense law since 1987. He is a trusted litigation strategist and true trial attorney with over 50 jury and bench trials to his credit. Dan has successfully represented both large companies and individuals and achieved substantial victories in well-publicized trials throughout California and the U.S.
He is experienced in business and corporate formation and administration, as well as all forms of alternative dispute resolution, including binding arbitration and mediation.
THE ROAD TO BECOMING A BUSINESS LAWYER AND LITIGATOR
Dan has almost 40 years of experience working with, for and against some of the largest insurance companies in the country. He has successfully tried and litigated cases in the areas of Healthcare Compliance, Commercial Litigation, Unfair Business Practices, Fraud, Breach of Contract, Battery, Premises Liability, Product Defect, Medical Malpractice, Discrimination, Sexual Harassment, Construction Defect, as well as Unfair Competition, Defamation, and Trade Secrets.
In December 2003, Dan commenced litigation against Health South Surgery Centers-West, Inc and its’ subsidiaries, exposing the company’s extensive mismanagement and misconduct of its’ surgery centers. Dan has also been asked by some of California’s largest municipalities and corporations to conduct legally required investigations into matters involving alleged employment discrimination and harassment.
