By Attorney Edward Jesson
It is often assumed when talking about purchasing a business that your only option is to purchase the business outright. However, there is a different solution which, depending on the circumstances, could have some benefits: purchasing the target business’s assets instead of the whole company.
When you purchase a business outright, be it all of the stock of a corporation or all of the membership interest in an LLC, you are buying everything. That includes all of the business’s assets but also includes all of the business’s liabilities, some of which could be unknown at the time of the purchase. In any business purchase agreement, there should be a “due diligence” period which will allow you to uncover as many of those hidden risks as possible, but it is nearly impossible to uncover every possible risk that exists.
Most purchase agreements will contain some form of indemnification clause providing that the seller will defend and insure the buyer from various liabilities. However, negotiating an indemnification provision that adequately protects the buyer can potentially increase the purchase price requested by the seller and can also be difficult and expensive to enforce if an issue does arise in the future.
However, when you purchase only the assets of a company you are buying the possessions of the business and putting them into a new business name. The buyer can (at least to a certain extent) dictate what liabilities of the selling business are being purchased which can assist in limiting the buyer’s liability and risk in moving forwards with the transaction. Another benefit of buying a business’s assets is that the buyer can also elect to purchase some, but not all, of the target business’s assets. For example, if you were buying a trucking company you may elect not to buy the old trucks that don’t have any useful life left.
There are downsides to an asset purchase. For example, contracts between the old business and its customers/vendors may need to be renegotiated in the new business’s name. There could also be similar implications with key employees depending on the terms of any employment agreements that were in place with the old business.
Whichever route you choose, it is important to work with a team of advisors who can assist you in the process. While not discussed in detail here, there are different tax implications depending on whether you purchase the business or just the assets, about which a CPA would need to advise.
If you’re thinking of purchasing a business, or a business’s assets, the attorneys at Jesson & Rains are ready to help you through the process.
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Kelly Rains Jesson