Acquisition Agreements 101

An acquisition agreement is an indispensable document in mergers and acquisitions. Here’s what a typical acquisition agreement for the sale of a business includes.

Entity Purchase vs. Asset Purchase

An acquisition agreement should address whether the purchase is for an entity or its assets:

Entity purchase agreements, known also as stock purchase agreements, allow the buyer to purchase a business by buying a majority—and sometimes all—of its stock. The new owner adopts the role of previous owners, and normally assumes the business’s debts and obligations.

With an asset purchase agreement, the buyer purchases the business’s assets, such as intangible property like trade secrets and copyrights, and tangible goods, such as real estate and office equipment. The corporate entity itself remains in the owners’ possession. When a buyer purchases a sole proprietorship or partnership, this is the ideal option because the business consists primarily of its assets. Without these assets, there’s no actual structure to deal with.

Choosing Your Acquisition Model

Businesses weighing their acquisition model must consider two key issues: liabilities for debts and other obligations, and taxes. An asset sale is usually better for the buyer in terms of taxes, since the buyer can depreciate assets. Sellers typically prefer entity purchases because they allow sellers only to pay taxes at the low capital gains rate. Sellers are often reluctant to do an asset sale with a C corporation, because this subjects them to double taxation—once for the business entity, and once for the shareholders.

In terms of debts and liabilities, buyers usually prefer asset sales. This structure relieves the buyer of any obligations for the business’s debts unless he or she opts to take them on. With an entity sale, a buyer is responsible for all liabilities of the previous business following the sale. To seal the deal, however, shareholders or LLC partners may have to take on some specific liabilities, such as for recent loans.

The type of acquisition agreement also affects ownership transfer, as well as factors such as whether agreements and leases can be transferred to the new owners.

Help With an Acquisition Agreement

For most owners, a business sale is a once in a lifetime opportunity. It’s something they do once—or, at most, a few times. So while they might be experts at running their business, they’re novices to the legal side of a sale. Acquisition agreements are complicated. A few changes in the wording can radically alter the deal.

Owners should seek the wise counsel of an experienced M&A attorney. Your lawyer can help with the initial negotiations, the drafting of the formal agreement, and every other step along the way. If you’re working with an M&A advisor, he or she may be able to direct you to a qualified lawyer. Friends who have sold or bought businesses may also have referrals to lawyers whose counsel they found particularly helpful. If you don’t have access to these resources, ask your local Bar association about lawyers specializing in business transactions.

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