PURCHASE AND SALE OF A BUSINESS
There are many points to consider when entering into an agreement to buy or sell a business. The buyer of a business is generally concerned with such issues as obtaining full disclosure, accurate determination of value of the business, asset purchase vs. stock purchase, allocation of assets in an asset purchase, representation and warranties of seller, not paying all of the purchase price at closing and how to finance the transaction. Sellers are primarily concerned with getting paid, asset allocation and limiting their liability post sale. Sellers are often required to finance a portion of the purchase amount, provide a personal guarantee by the principal of certain representations, provide consulting services for a term, and enter into a non-competition agreement.
Purchase and sale agreements generally fall in two categories, the asset purchase of a business and the stock purchase of a business. In the asset purchase, the buyer forms a new entity and purchases all of the assets of a business, often including the business name and goodwill, so that the public generally is unaware that a purchase occurred. The buyer must also make a determination as to the choice of entity to form, a corporation (C corporation vs. S corporation) or a limited liability company. In a stock purchase, the new buyer purchases all of the stock of an existing company. For a buyer, the primary advantage of an asset purchase from a stock purchase is that a new entity offers more protection against inheriting unknown liabilities of an exiting company. Sellers often prefer a stock sale for tax purposes, but are generally forced to accept an asset purchase structure. Our experience is that small businesses are generally purchased by asset purchases with the formation of a new corporation.
In addition to obtain legal counsel for decisions of buying or selling a business, it is vital to obtain good tax advice from a CPA.