In business acquisitions, buyers and sellers typically use a variation or combination of one or more of these basic methods of buying a business:
- asset purchase
- equity purchase
In an asset purchase, the buyer acquires designated assets and assumed certain liabilities of the business. Buyers generally prefer asset purchases because they can acquire only the asset they feel are necessary to the business and determine which liabilities they assume. An asset purchase can avoid the buyer's assuming undesired liabilities of the business, as well as bypassing many governmental regulations dealing with mergers. An asset purchase can avoid potential securities law issues that may result from the sale of equity.
In an equity purchase, the buyer acquires the ownership interest of the entity that operates the business being acquired and becomes the owner of the entity. The entity continues to own its assets and remains responsible for all its liabilities. If owner officers and directors/managers operate the entity and its business, a buyer can obtain control of that business by buying the equity directly from the owners, even if management is against the sale. Normally, this will not be the case in the purchase of a privately held entity, where the deal is normally negotiated by the principals.
In a merger, one entity merges into another entity. It can be accomplished in one of several ways. For example, the target (the entity acquired) can be merged into the buying entity, with the target disappearing. Alternatively, the buying entity can be merged into the target, with the buying entity disappearing. Another method involves the buying entity and target combining to form a new entity. Often, a merger involves using a subsidiary of the buyer to acquire the target, resulting in a “ triangular” merger. If the subsidiary is merged into the target, then it is a “ reverse triangular” merger. The surviving entity will own all the assets, rights, and liabilities of the buying entity and the target.
This article from the law offices of Thomas D. Solomon is provided as a courtesy to provide information of interest in connection with buying or selling a business. It is not and is not intended to be an exhaustive treatment of its subject matter, but rather an overview of some of the pertinent elements of such a transaction. It is not intended to be legal advice or a legal opinion and should not be relied on in making legal or business decisions. If you have any questions, please call (713) 984-9400 or email [email protected].