When you are preparing to purchase another business, the acquisition agreement is a crucial step in the process. Here’s a brief overview of what you can expect out of an acquisition agreement.
Two models of purchase agreements
There are two general models of purchase agreements: an entity purchase agreement and an asset purchase agreement. The way the transaction actually occurs will really depend on the size and type of each business involved, but you can at least have a general idea of what to expect when you use one of these two models.
In an entity purchase agreement, the buyer purchases the business entity through buying a majority (or all) of its stock. In this situation, the new owner of the company fulfills the role of the previous owners of the purchased company, and also takes on all of that company’s debts.
In an asset purchase agreement, the buyer purchases all of the assets, whether tangible (real estate, inventory, equipment) or intangible (intellectual property, trade secrets). While the structure of the purchased company, along with its original owners, remain in place, there is not really a business to run anymore, because all of the assets are gone.
Selecting a model of acquisition
So which model of purchase agreement works best in your situation?
First, you should consider the tax implications of the purchase. Usually it is better from a tax perspective to use an asset purchase agreement, because the buyer can start depreciating those assets almost instantly. The seller, however, often prefers an entity purchase agreement, because such an arrangement allows the seller to pay taxes at the lower capital gain rate. This is especially true if the seller is a C corporation, because that structure places them at double the tax risk.
The other primary consideration is debts and liabilities. It’s also a better arrangement for the buyer to use an asset sale from this perspective, as the buyer does not take on the business’s debts unless they agree to do so. Obviously, the seller would rather have the debts taken on by the new owner, which makes an entity sale advantageous to them.
Ultimately, coming to an agreement in a sale and the kind of acquisition agreement that will be used for that sale takes a significant amount of negotiation. Trained business planning attorneys are skilled in working with both parties in business sales to help develop arrangements that work for all sides.
To learn more about acquisition agreements and the steps you should take if you are preparing to sell or purchase a business, we encourage you to contact an experienced corporate planning attorney in the U.S. Virgin Islands. We will be happy to answer any questions you have.
Steven K. Hardy is Chair of the Corporate Tax & Estate Planning Practice Group at BoltNagi PC, a full service law firm in St. Thomas, U.S. Virgin Islands.