When is a stock purchase better than an asset purchase? The primary advantage is a stock purchase agreement allows you to take controlling interest in or buy an entire corporation. Legally, it’s like “stepping into the shoes of the seller.”
If the company you wish to acquire is an LLC you will need to discuss an LLC Membership Interest transaction with your experienced Watkins Firm mergers and acquisitions attorney. LLCs do not issue stock, and the question is going to center on the purchase of an individual member’s position in the LLC or the purchase of a controlling membership interest. If you want control of the company a single membership interest may not be enough.
Are There Drawbacks to a Stock Purchase?
The primary drawback to a stock purchase when compared to an asset purchase is the extent of your contingent liability. The experienced mergers and acquisitions attorneys at the Watkins Firm have 40+ years of experience serving the business, science and tech, real estate and medical / healthcare communities here in San Diego and across California.
Pro-Tip: “By the way, everybody’s different. Every transaction. Different people who own companies, that sell companies, have colorful personalities and they’ve gotten successful by doing things in a certain way, and you have to be able to work with them on their terms.
So you meet with them, you find out what they want. You run some ideas by them, you run it by their accountant, and then you come up with a letter of intent. Or if you’re the buyer’s counsel, or even if you’re the seller’s counsel, you start discussions off with the goal of turning them into a letter of intent.” – Dan Watkins, Managing Partner
We understand the complex nature of purchasing a corporation or an LLC and how to protect our clients during a stock purchase transaction or a membership interest transaction. While there are genuine risks associated with any business acquisition there are certainly factors that make a stock purchase better than an asset purchase transaction.
When is a Stock Purchase Better Than an Asset Purchase in California?
There are times when you want absolute control of a corporation, without disrupting the existing employee workforce or the delicate relationships with existing 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. 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.
When is a stock purchase better than an asset purchase? The answer lies in the mastery of limiting contingent liability and when it is important to seize control of a corporation and its employees, customers, assets and intellectual property.
If you are considering a stock purchase we invite you to review our podcast Episode 40 – Keys to a Successful Stock Purchase Acquisition as well as the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today. Learn about our four decades of service to the San Diego and California business community and our ability to effectively advise and protect you throughout this process.
