“Leave the Gun. Take the Cannoli.” Structuring Your Business Purchase to Avoid Taking On Unwanted Seller Liabilities
By: Attorney Samuel J. Spurney
“Leave the Gun. Take the cannoli” is a rguably one of the most famous lines in movie history. In the movie, The Godfather , Peter Clemenza – fictional hitman for the Corleone crime family – utters this line after avenging the betrayal of the Corleone family by one of its members.
Asset Purchase Acquisition Structure
The same can be said for business acquisitions structured as an asset purchase – one of the key advantages of acquiring a business via an asset purchase is that the purchaser “leaves” unwanted or undisclosed liabilities of the seller, and “takes” only the intended assets and liabilities of the seller. For example, in an acquisition of a fictional manufacturing company, the purchaser may agree to acquire all physical and intangible assets of the seller – the equipment, machinery, inventory, work in process, contracts, purchase orders, and intellectual property, among other assets, and will specifically exclude in the purchase agreement most of seller’s liabilities, such as seller’s accounts payable, employment claims or liabilities, or any other claims and liabilities arising from the operation of the business before closing.
To accomplish an asset purchase, the buyer typically creates a new legal entity, such as an LLC or corporation, and takes title to seller’s assets at closing via such new entity. Buyer does not purchase any stock or equity in the seller’s company. Because buyer’s legal entity is a separate legal entity from the seller, and while there are exceptions [1] , generally the liabilities of seller are not assumed by buyer and are limited only to those liabilities that buyer agrees to assume as stated in the purchase agreement executed by buyer and seller.
Stock Purchase Acquisition Structure
A stock purchase is another form of business acquisition structure. In a stock purchase, the purchaser acquires the ownership of the selling company’s stock (if a corporation) or units (if an LLC). By purchasing the selling company’s stock, buyer, by operation of law “steps into the shoes” of the seller and acquires all of the assets, rights, and generally all of the liabilities of seller’s company. For example, using the manufacturing company example mentioned above, if the acquisition is structured as a stock sale, buyer would then purchase 100% of the stock of the seller’s company and would own all of seller’s assets but would also be responsible for all of seller’s liabilities and other obligations.
It is important to note that there are factors other than the potential liabilities of the seller to consider when determining if structuring an acquisition as an asset sale or stock sale makes the most sense, including without limitation tax considerations. There are certainly situations where a stock purchase is a preferred transaction structure for both buyer and seller. If you have any questions regarding the purchase or sale of a business, please do not hesitate to contact the attorneys at SB Law to discuss. We would be honored to represent you and your business.
Steimle Birschbach, LLC. Straight talk. Solid Advice. That’s our way of doing business.
This blog post is provided for informational purposes only and by its very nature is very general. This information is not intended as legal advice.
[1] It is crucial for a buyer to confirm that all liens, claims, and encumbrances are terminated and removed from the seller’s assets and real estate before closing. This is customarily done by performing lien and title searches during due diligence.
