Stock Purchase Agreements
What is a Stock Purchase Agreement?
The purchase of an existing, on-going business may be typically structured in one of three different ways:
1. a merger of the two businesses;
2. a stock purchase (or a membership interest purchase if the entity is an LLC); or
3. an asset purchase. The basic form or structure of the transaction must be determined very early in the negotiations, and only after you have received counsel from (a) your certified public accountant; (b) a business valuation analyst; and (c) your attorney. Often the parties will desire to summarize their preliminary understanding with a negotiated letter of intent.
When do I need a Stock Purchase Agreement?
The structure of a business acquisition may be compelled by a number of matters, for example, the sellerís known, unknown, and contingent liabilities; or the sellerís tax position in a major asset; or sales price financing issues; or required consents and approvals. For the smaller business, more often than not the buyerís tax and legal professionals will encourage the buyer to structure the acquisition as an asset purchase to avoid or limit issues relating to the assumption of sellerís liabilities (disclosed, undisclosed, and contingent). However, circumstances may exist which will require that the acquisition be structured as a stock purchase (or a membership interest purchase if the entity is an LLC). The buyer under this acquisition structure will bear considerably more exposure to liabilities of the existing (and continuing) entity, especially if the seller is "less than candid" with the prospective buyer during the due diligence phase.
Concerns related to a Stock Purchase Agreement?
Stock purchase agreements (or a membership interest purchase agreements if the entity is an LLC) are often very complex because of the buyerís numerous concerns, for example: the sales price, payment or financing of the sales price, identifying proprietary information and intellectual property owned by the entity, identification of liabilities, inventories of assets and inventory, closing date, sellerís representations and warranties to the buyer, sellerís indemnification of the buyer, covenants not to compete, post-closing cooperation by seller, conditions that must be fulfilled before buyer is obligated to purchase, and risk of loss for a casualty or catastrophe that occurs before the closing. And all of these maters must be addressed so that the buyer clearly understands both the upside and the downside of the transaction. Normally the buyer will make an offer to purchase in the form of an stock purchase agreement (or a membership interest purchase agreement if the entity is an LLC) which is prepared by the buyerís counsel.
I assist both the sellers of stock (or membership interests if the entity is an LLC) and the buyers of stock (or membership interests if the entity is an LLC) in the negotiation and preparation of stock purchase agreements (or membership interest purchase agreements if the entity is an LLC).