When deciding to sell a company, business owners have plenty of critical and complicated decisions to make. And among those tasks is selecting the appropriate legal structure for the sale itself.
Small and mid-sized business owners have three choices: A merger, a stock sale and an asset sale. Each option comes with its own benefits and disadvantages for both the buyer and the seller.
Here’s a high-level view of the three types of transactions, along with some of their upsides and downsides.
Mergers happen when two companies – the target company and the buyer – come together to form a single entity. The target company’s owners or stockholders get paid in stocks, cash or a mixture of both for the transaction.
There are different types of mergers. Exxon-Mobil is an example of a horizontal merger, where two companies that used to compete with similar products come together. Another type is a vertical merger, when two companies each have a line of business that complements the other and they come together for that reason. A conglomeration is a merger of two companies with two completely different products, such as luxury goods retailer Louis Vuitton merging with Moet and Chandon.
In some cases, and to avoid any of the target company’s existing liabilities, the buyer will create a subsidiary to either absorb the target company or be absorbed by it. That, along with some other regulatory requirements, can make a merger more complex than, for instance, a stock purchase.
But, there’s an upside to a merger, especially for larger companies with many stockholders – or stockholders who are against the sale. Mergers do not require all stockholders to sign off on the deal. As long as a majority of stockholders agree, the transaction can be completed.
A stock purchase is just what it sounds like. In this transaction, the buyer purchases the target company’s stock from its stockholders and takes over its assets and liabilities. Nothing changes at the target company – at least immediately – other than company’s ownership.
For small and mid-sized companies with very few stockholders who all support the transaction, this may be the best and most streamlined option.
But it can be a more complicated process for companies with larger numbers of stockholders who aren’t all on board with the sale. To get 100 percent control of the company, all stockholders must be willing to execute the deal. If they don’t, the buyer could be stuck with unhappy minority stockholders who could make ownership challenging.
With an asset sale, often a favorite of those acquiring a company, the buyer purchases specific assets and liabilities that are singled out in the sale agreement. The target company continues to own any remaining items that aren’t part of the transaction.
This option is particularly popular with buyers who are interested in only part of a company, perhaps a specific division or unit. But, it can be more complicated than a stock purchase.
Selling off physical assets, equipment or buildings often is easier than switching over the ownership of business licenses and permits or patents, trademarks and other intellectual property as the sale of those could trigger additional rules and requirements.
In an asset sale, the parties must weed out the assets that will either be sold or remain with the target company and take care of the necessary paperwork and transfers.
What’s best for your company?
When it comes to a merger, stock sale or asset sale, there’s no quick and easy checklist to determine how you should proceed. Exactly what legal structure is best for the sale of your company will depend, in part, on the business. That decision also will rely on the clashing interests and goals of both you and the prospective buyer.
At the same time, your ultimate decision will set in motion further business, tax and legal ramifications that aren’t covered here. So, it’s always best to consult with your attorney and tax expert to ensure you’re making the best decision for your company, your future and your wallet.
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