UNDERSTANDING SMALL BUSINESS PURCHASING TRANSACTIONS

Purchasing a business is one of the most important financial transactions of your life. The purchase of a business is a very complicated transaction with many considerations to be had along the way. However, the most important question that a buyer of the business needs to answer is whether they will be purchasing the assets of the existing business or the stock of that business.

An asset purchase involves a transaction where the buyer pays the existing business for the assets of the business. These assets generally include land, buildings, contracts, inventory, intellectual property and goodwill. In an asset sale, the owner of the existing business retains ownership of the original company structure. The buyer will generally form a new company to operate a business using the assets purchased from the existing business.

In a stock purchase the buyer purchases the shares of the existing business. In this type of transaction, the buyer purchases the entire company which operated the existing business and along with that purchase comes all of the assets of the company. In a stock purchase, the buyer purchases the stock of the existing business directly from the owner of the existing business.

Advantages and disadvantages of an asset purchase compared to a stock purchase.

Both asset purchases and stock purchases have their own advantages and disadvantages. The following is a brief rundown of some of the general advantages and disadvantages of an asset purchase compared with stock purchase from the buyer’s perspective

Advantages of an asset purchase for the buyer:

The buyer does not have to assume any of the liabilities of the existing business. Instead, the buyer simply takes the assets of the business.

The transaction is generally less complicated because several requirements of state and federal securities law are inapplicable.

The buyer is able to take a “stepped-up” basis in the assets it purchases based on their value at the time of the purchase.

In certain circumstances the buyer will be able to purchase the assets of the company over the objection of minority shareholders. In such a situation, a stock purchase would most likely not be possible.

Disadvantages of an asset purchase for the buyer:

The buyer may encounter problems in transferring certain contracts, such as vendor and supplier contracts.

Some of the contracts may not be able to be assigned.

With an asset purchase, the Seller will still need to liquidate any of the assets which were not purchased by the buyer and pay any of those liabilities which the buyer did not assume. Accordingly, the seller is likely to figure these costs in and demand a higher purchase price.

The licensing consideration.

The restaurant attorneys at Hays Firm LLC we deal with many restaurant owners and other businesses that hold licenses with the City of Chicago and other municipalities and government entities. These licenses are essential to the operation of our clients’ businesses it is therefore necessary to ensure that purchase complies with Chicago liquor laws. If a business holds a license, such as a restaurant license or liquor license, the buyer of that business will be required to engage in a stock purchase of the existing business in order to maintain the license. If the buyer purchases the assets of an existing business, such as a restaurant or liquor store, the buyer will then need to apply for an entirely new liquor license, and any other license. For example, a business may hold a liquor license which has been “grandfathered in” and a new liquor license will not be possible at that location. In such an instance, the buyer must purchase the stock of the existing business in order to keep the liquor license active.

Conclusion

There are many factors to consider in determining which type of business purchase is best for you and your situation. If you would like to discuss the specifics of your situation and the pros and cons of the different approaches, please do not hesitate to contact the experienced Chicago-based small business and restaurant attorneys at Hays Firm LLC. Please contact us anytime. We look forward to hearing from you.