Selling Your Business: Asset Sales, Stock Sales & Mergers

If you’re a business owner looking to sell your company, you have a few options to consider. How you structure a business sale matters because each method comes with its own pros and cons. Read below for a brief overview of three common types of business sales. Should you have any further questions or wish to begin this process, feel free to reach out to our lawyer at Duke Law Firm for help! We have helped business owners buy and sell businesses ranging from $100,000 to $500,000,000 through all three of these type of structures. Each transaction is unique and depends on the business objectives of the buyer and seller.

Asset Sales

During an asset sale, a buyer purchases some or substantially all of a seller’s company’s assets. Assets can include anything the seller’s company has that has value, such as its contracts, intellectual property rights, inventory, machinery, and more. Sellers can also pass their company’s liabilities on to the buyer as a condition of the transaction, although any that are not assumed by the buyer stay with the seller’s business after closing. Generally, the seller’s company survives an asset sale and can continue to operate or in many circumstances can wind up its existence after the closing of the transaction.

Pros of Choosing an Asset Sale:

  • The buyer can choose which assets and liabilities it can take post transaction. Any potential risk of operation in the past can remain in the selling company.
  • The flexibility of an asset sale can attract more buyers because more are willing to purchase when they can pick and choose assets and liabilities.
  • The buyer often gains considerable tax benefits from an asset purchase, thus making the seller’s offerings more attractive.
  • A limited asset sale may not require the approval of the selling company’s stockholders

Cons of Choosing an Asset Sale:

  • Sellers who intend for their companies to survive after the sale must carefully consider all possible ramifications of the sale. If a company can’t operate as intended after selling off certain contracts or properties, then the sale may have failed its purpose.
  • Asset sales are not a good way to close a business. Chances are not every asset will get bought and not every liability will be assumed by another party. This can leave business owners with considerable complications to deal with.
  • Sellers who want to sell contracts will need to acquire the consent of the third parties involved in those agreements.

Stock Sales

Stockholders who want to sell out of a company can find a buyer willing to purchase their business interests. Unless specified in the acquisition agreement, nothing about the company fundamentally changes other than who owns the shares.

Advantages of a Stock Sale:

  • Relatively simple to execute, especially compared to a merger or asset sale.
  • Because the company doesn’t change at all or very little, anti-assignment provisions are typically intact.
  • Stockholders are directly compensated for their shares.

A Disadvantage of a Stock Sale:

  • Many company governance documents have certain prohibitions regarding the sale of stock.
  • A buyer’s attempt to purchase stock can be frustrated by a company’s other stockholders who may oppose the sale or can’t be reached to approve it. Stock purchases may not be the best suited for companies with many stockholders or those who are inclined to reject the sale.

Mergers

A merger does what it sounds like: It brings two distinct companies together into a single legal business entity, thus combining the assets and liabilities each company had in the beginning.

Most mergers end up being “triangular” mergers. These are business transactions where the buyer creates a wholly owned subsidiary company that gets absorbed by the seller’s business, leaving the latter in possession of the buyer. The interests of those who own equity in the seller’s business are canceled in exchange – usually – for cash or stock in the new company, supplied by the buyer.

Pros of Choosing a Merger:

  • Often simpler than asset sales because merged business asses condense under a single legal entity.
  • All of a company’s interests can be transferred without consent from all of its stockholders. Instead, a merger must meet the state’s stockholder approval requirement which can range from a majority to a super majority (75%). .
  • Stockholders of a sold company are paid merger consideration (cash or stock in the new company) directly.

Cons of Choosing a Merger:

  • A merger can involve more steps than other types of sales.
  • Some mergers can extinguish the seller’s business as a legal entity, causing a breach of anti-assignment terms in previously entered contracts. All existing contracts will need to be reviewed and potential conflicts mitigated – this can sometimes involve obtaining the consent of third parties to the merger.
  • The realities of the target are assumed as liabilities of the surviving company.

You have many options to consider and weigh against each other if you’re looking to sell or purchase a business. If you need someone with not only the experience to advise you on your best possible options but also the skill to help you execute them, consider reaching out to a business attorney for help.

At Duke Law Firm, we have in-depth knowledge and experience from transactions ranging from the thousands to the millions. In addition, we are entrepreneurs and business ownersthat can partner with you and give you the advice you need to make the decision that’s right for you. If you want an opportunity to learn more about how we can help, reach out to us to schedule a consultation.

Get in touch with Duke Law Firm today by contacting us online or by calling (210) 880-0652.