When selling or purchasing a business, the structure of the corporate transaction can be important, particularly with respect to contracts, disclosure requirements, and liabilities. In Part One of our series, we introduced high-level distinctions between stock and asset sales, HERE. In today's article, we analyze stock sales in greater detail.

Stock Sale Advantages

The simplest way to purchase a business is to simply buy all of the outstanding stock in the company from the existing shareholder(s).

The business can easily keep running throughout the deal process with little or no interruption. Sometimes the business’s employees and customers will not even be aware that the transaction has taken place.

Nothing needs to be retitled, the contracts all still stay in effect and there is no need for the business’s relationships with employees to change.

Stock Sale Disadvantages

However, there are certain drawbacks to a stock deal. For example, the buyer is buying the entire company and that includes all liabilities associated with that company.

These liabilities can be known or unknown. For example, if a company has debt, then the buyer, as the new owner, would obviously be purchasing the company subject to that debt.

Also, if the company has contractual obligations, then those obligations stay with the company and become the obligations of the new owner.

Furthermore, if the company has some type of ongoing litigation, then the new owner will be responsible for those legal issues as well.

Disclosure of Liabilities

One thing that a buyer should be mindful of is that most businesses could have potential unknown liabilities. For example, after the transaction is completed, someone could come forward and claim that he or she was injured by the company’s product or other actions that occurred before the company was purchased.

Similarly, in the context of a pharmacy sale, the government often commences an investigation years after claims have been paid. If these types of unknown legal issues are not dealt with at the time the company is purchased, the financial implications for the buyer could be devastating.

Dealing with Shareholders

One issue that can make a stock deal impossible is if a minority stockholder does not want to consent to the deal.

Depending on the rights of the minority stockholders provided by the relevant state corporate laws as well as the company’s incorporating documents and any existing shareholder agreements, minority stockholders might be able block a sale of the company’s stock.

Tax Implications

A significant consideration in the sale of any business is tax treatment. In a stock deal, the buyer may lose some tax benefits that are available in an asset sale.

Depending on the facts of the deal, these tax benefits can be substantial. In Part Three of our series, we will discuss the tax advantages of doing an asset sale.

Conclusion

It is often also a good idea to seek the advice of competent legal counsel early in the negotiation process to determine which type of deal structure would benefit you the most. Please do not hesitate to contact us with any questions.