Getting What You Pay For: Buying & Selling a Business
Starting a business from scratch is often more expensive, risky and time consuming than simply acquiring an already existing business. Just some of the reasons for this are that the business you’re looking to acquire may already have a customer base, facilities, key employees, and relationships with suppliers that would otherwise require substantial, independent effort to develop. Of course, the trick to buying a business is to make sure you get what you pay for – no more and no less.
Normally, what one would consider to be the heart and soul of a business is contained within its legal structure (or entity), such as a Corporation or Limited Liability Company. The acquisition of the business can thus be structured as either an Asset Purchase or Stock Purchase, both of which have pros and cons.
A Stock Purchase is the purchase of a controlling ownership interest in the entity that serves as the vehicle for the business. When you purchase the business in this type of deal, you get everything – good, bad, and ugly – that the business owned or owed at the time of the closing. It’s therefore almost impossible to start with a clean slate. On the other hand, the web of contracts and agreements involving management, lenders, and others may be too cumbersome to recreate at a new company.
Although considerable factual and legal due diligence is necessary in either type of deal, one way to limit unforeseen liabilities and other potential problems is to have the company sell you the assets that make up the business. This is known as an Asset Purchase and can be doable if the list of assets is not too varied and voluminous. The seller should warrant that the assets are free and clear of any liabilities and should covenant (or agree) to defend, indemnify and hold you harmless if this turns out not to be the case. Of course, in an Asset Purchase you lose the benefit of slipping into the shoes of an established company.
In the end, just make sure to know what you want and how you plan to get it before you start to negotiate.