FAQ: Stock Purchases

When buying an existing business, there are three options to consider. You can either do an asset purchase, where a buyer can purchase particular assets owned by the business; a merger, where two entities will be merged together, or a stock purchase; where the buyer buys out all the stock (or other equity interest) from its then-owners. In this article we will answer commonly asked questions about stock purchases and how they work.

Can I Buy A Company Without “Stock”?

Yes, while the term stock purchase implies that the company has stock, that isn’t always the case. If the business in question is an LLC, for example, the ownership may be set up in ‘units’ or ‘membership interests’. As long as the business is held in a legal entity, a ‘stock’ purchase is possible. If the business is a sole proprietorship, however, this type of purchase isn’t going to be an option.

How Does the Ownership of Assets Transfer with a Stock Purchase?

With a stock purchase, all of the assets of the business will remain ‘owned’ by the business itself rather than by the individual owners. This means that, unless certain contracts prevent a “change in control”, there is nothing that needs to be done in order to transfer ownership of assets. This is unlike the asset purchase method of buying a business, which requires the ownership of each asset to be transferred.

Do Permits & Other Agreements Transfer In Connection With a Stock Purchase?

Any permits, leases, employment agreements, and other similar items that are issued to the business will remain in place; but, it’s worth noting that some of these items (particularly permits and leases) may require consent or notice to the third party in the event of a “change of control”. So, the language of contracts, permits, or relevant statutes could impact what needs to be done in order to legally transfer those items in connection with a sale.

What Happens to Existing Business Liabilities?

When someone buys out all the stock of an existing business, they are buying out both the assets and the liabilities. This means that the new owner will need to begin repaying any debts or other financial obligations that the company has in place. They will also assume any legal risks or other issues that exist, which is one reason that it is so important to do a complete check on the business before buying. For example, the buyer in a stock deal will be taking on the risk of claims that occur prior to closing. Some of the big items are things like employment claims (e.g., claims employees may have against the company for past employment practices and misclassification of independent contractors), taxes (e.g., employment taxes, sales taxes, income taxes (depending on the structure of the entity)), employee benefits plans (e.g., proper administration of ERISA plans), and contracts (e.g., breaches under existing contracts). It is possible to have the existing owner assume indemnification obligations of certain liabilities as part of the negotiations, but the company purchased will still be the party primarily liable to the third party. Thus, structuring indemnification must be done correctly in order to avoid any potential complications down the road.

Are There Tax Advantages to a Stock Purchase?

When it comes to taxes, the seller of the business will gain some advantages by selling via a stock purchase. Depending on the circumstances of the business being purchased, the buyer might be better off using the asset purchase method because they will be able to better generate depreciation deductions for the physical assets of the business. In many business sales, the structure of the transaction is a point of contention between the parties.

Is an Attorney Necessary for a Stock Purchase?

Absolutely. Any time you are purchasing (or selling) a business you need to have an attorney working with you throughout the process. Even purchasing a small business is going to be a complex legal matter, and one that you want to ensure goes smoothly. Contact Doida Law Group to set up a consultation to discuss your options today.

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