By: Bob Goldberg, RSPA General Counsel
Consolidation of the industry continues with both suppliers, payment processors, and resellers purchasing businesses to expand their footprints and market share. Sellers often reach out to the RSPA Legal Hotline to discuss the form the sale should take. The correct answer involves multiple variables. If the seller is a C-Corporation that has not elected Sub-Chapter S status, a stock sale is most likely preferable to the seller. The reason for this is that a sale of assets by a C-Corporation will be taxable both at the corporate level and again when distributed to the shareholders. If the shares of stock of a C-Corporation are purchased, the sale will not be a taxable event for the corporation and the shareholder will receive capital gains treatment. Capital gains tax rates are less than personal tax rates. Thus, the purchase price for the business will net less to the seller if assets are purchased rather than stock of a C-Corporation.
Purchasers shy from stock purchases for stock represents both the assets and liabilities. Although there are legal provisions to protect the purchaser, an asset purchase avoids many issues. In an asset purchase what is being sold? Business assets refer to any item of value owned by a company, such as tangible goods like inventory, contracts, office furnishings, phone numbers, websites, company name, customer lists, leases, maintenance and support agreements, real estate, vehicles, as well as intangible items like intellectual property and goodwill. Before an asset sale can be made, a business owner must complete an asset purchase agreement (APA).
An asset purchase agreement has several purposes. First, if a Letter of Intent was entered, the APA incorporates those terms into a binding agreement. An APA is used to describe the assets to be purchased, thus ensuring there is no confusion later on about what exactly is being bought. Next, it sets forth the terms in which the goods will be transferred, including information like dates and similar details. Finally, it lays out the rights and responsibilities of both the buyer and seller. Before an APA can be deemed valid, both parties must read, agree to, and sign the agreement.
When developing an asset purchase agreement, there are a number of important elements to include in the contract. One of the first things the agreement will identify is the parties entering into the agreement. Some corporate entities may have numerous subdivisions, and it is important to specify which are involved. The asset purchase agreement must also include what is being purchased in great detail while being as descriptive as possible. Whether the assets include a conference table and chairs or a specific piece of equipment, it is important to provide as many details as possible to help eliminate any confusion and misinformation. This is typically done in Schedules attached to the APA.
Of course, the agreement should also discuss price. In addition to specifying the price that will be paid by the buyer to the seller, you will want the agreement to detail how the assets will be paid for. In many cases, a buyer will pay for the assets in full at the closing of the agreement. Often there is a holdback to protect the buyer from claims. If the transaction involves any warranties, you will also want to include this information in the asset purchase agreement.
There are a number of advantages of an asset purchase agreement. One of the biggest benefits is that the buyer is able to choose the assets and liabilities that they want to acquire. This usually means less risk for the buyer as there are no hidden liabilities that could result in financial repercussions down the road. Another major perk of an APA is that a buyer is able to allocate the purchase price of the assets so that they reflect the market value. This can result in higher depreciation which results in future tax savings. A high allocation to goodwill will also benefit, the seller. Buying a business through an asset acquisition is often less complicated as neither party is required to comply with federal and state securities laws and regulations.
Selling or buying a business is a significant transaction that if not done properly can cost you. Seek knowledgeable assistance to avoid costly mistakes. Of course if you have any questions, call the RSPA Legal Hotline.
