Acquisition agreements are among the most consequential documents for business owners. This agreement is like a contract that lays out the terms and conditions of the purchase of a business by another, and is also used for the merger of two businesses. It consists of multiple documents, such as the purchase agreement, along with others that are required for completing the transfer of the company’s ownership. If you are planning to acquire another company, it is recommended to have an experienced business law attorney by your side to help you draft a legally sound and detailed acquisition agreement that safeguards your interests in every way.
Since these agreements are individually and independently drafted and negotiated, they don’t have any industry standard form. That being said, most businesses follow the same typical plan for acquisition agreements. Attorneys generally follow customary forms, in order to save time and energy, and ensure they don’t miss out any minute details.
Asset Purchase Agreements vs. Entity Purchase Agreements
Depending on the size and type of your business, the transaction method can differ greatly. However, an acquisition agreement is usually in either of the two forms: an asset purchase agreement or an entity purchase agreement.
Asset Purchase Agreements
In this acquisition model, the acquirer buys all assets of the business, including intangible property, such as trade secrets, trademarks, patents, and copyrights, and tangible property, such as office equipment, real estate, inventory, and others. The shell of the company, i.e. its LLC or corporate ownership, stays with the original owners, even when they have no authority over running the business anymore. In case of a partnership or a sole proprietorship, this is the preferred method, as there is no shell in place; meaning that once the assets have been sold, there is no business structure left for them to worry about.
Entity Purchase Agreements
Also known as stock purchase agreements, this agreement is used when the buyer gets acquisition of the other company by purchasing a majority of its stock. The buyer generally replaces the previous owners, and is also liable to pay all debts and outstanding credit obligations.
Choosing the Right Model for Acquisition
If you are planning to acquire a business, there are two important aspects you need to consider:
- Debts and obligations: In terms of debts and obligations, the preferred method for a buyer is an asset sale because they won’t have to be liable to pay off existing debts, unless the buyer consents to take care of them. But in case of an entity sale, the buyer has to take on all liabilities and debts after they have purchased the business, which is least desirable.
- Taxes and liabilities: In terms of taxes and liabilities, selling an asset is more beneficial for the buyer because they can start depreciating their newly acquired assets sooner. On the other hand, the seller prefers using the entity purchase method because they have to pay taxes only at relatively lower rate of long-term capital gains.
How you proceed to acquire the other business also affects the method of transferring ownership, and whether a lease can be assigned or transferred to the new owners.
There are a lot of intricacies involved when acquiring another business. It is recommended that you take help of a reliable and experienced business law attorney, who can provide comprehensive legal counsel and diligently protects your interests at every step of the process. For more information about business acquisition and mergers, contact the Law Office of John C. Grundy at 330.637.9030 or online to schedule your consultation today.