Acquisition Agreements (for Sale of Business)
Tips on using an acquisition agreement when one business buys another.
An acquisition agreement is a crucial part of the process when one company acquires another. Read on to learn about what happens in a typical acquisition agreement for the sale of a business.
Entity Purchase vs. Asset Purchase Agreements
Although the transaction itself can vary widely depending on the type and size of the business(es) involved, an acquisition agreement usually takes one of two forms: an entity purchase agreement or an asset purchase agreement.
Entity purchase agreements (also known as "stock purchase agreements"). In this arrangement, the buyer purchases the business entity by buying a majority (or more) of its stock. The new owner generally steps into the shoes of the previous owners, assuming all debts and obligations.
Asset purchase agreements. In this arrangement, the buyer purchases all of the business's assets, both its tangible property (inventory, real estate, office equipment, etc.) and intangible property (copyrights, patents, trademarks, and trade secrets). The company's shell -- its corporate or LLC ownership -- remains in place with the original owners, even though there is no business to run anymore, as a practical matter. This is the deal of choice for the purchase of a sole proprietorship or a partnership because the business has no shell to speak of: Once the assets are gone, there's no structure left to worry about. (To learn more about putting a dollar value on an existing business, see Nolo's article Pricing a Business.)
Which Acquisition Model Should You Follow?
There are two issues to consider when choosing an acquisition model: taxes and liabilities for debts and obligations. Tax-wise, an asset sale is usually better for the buyer because the buyer can begin depreciating the assets sooner. The seller usually prefers an entity purchase because the seller pays taxes only at the low long-term capital gain rate. Sellers are especially wary about using an asset sale for a C corporation, because that will leave them at risk for double taxation, once for the corporate entity and then again for the shareholders.
As for debts and liabilities, an asset sale is usually preferable for a buyer, because the buyer won't be responsible for existing debts of the business unless the buyer agrees to take them on. That's not the case with an entity sale, in which it's assumed that the buyer will take on all liabilities of the previous business after the sale. (To make the deal happen, however, the selling shareholders or LLC members may have to accept responsibility for some specified liabilities, such as a recent bank loan.)
The choice of acquisition arrangement also affects how ownership is transferred and whether a lease for the business can be transferred or assigned to the new owners.
Getting Help with an Acquisition Agreement
If you're thinking about entering into an acquisition agreement to buy or sell a business, you may find that things can get pretty complicated in a hurry. You might want an experienced business attorney on your side at every step of the process -- from preliminary negotiations to drafting a formal agreement. Use Nolo's Lawyer Directory to find an experienced business law attorney in your area. And, to learn more about the ins and outs of business acquisitions, check out Nolo's Buy or Sell a Business section.