Tysons Corner Business Purchase and Sale Attorneys

Understanding the Structure of Business Transactions: Asset vs. Stock Sales

When buying or selling a business, one of the key decisions will be whether the transaction will be structured as an asset purchase or a stock (or equity) purchase.

Asset Purchase Transactions

In an asset purchase, the buyer acquires specific assets of the business, such as equipment, inventory, intellectual property, real estate, and contracts. The seller retains ownership of the corporate entity, which may continue to exist after the transaction. These transactions may be more complex, because multiple types of assets will need to be assigned and transferred. However, a buyer will have more flexibility to acquire specific assets and avoid assuming certain liabilities.

Key characteristics of asset transactions include:

• Ownership Transfer: Title to individual assets is transferred through bills of sale, deeds, or assignment agreements.
• Liability Management: Buyers generally avoid assuming unwanted liabilities unless expressly agreed upon.
• Tax Treatment: Buyers may benefit from a stepped-up basis in the acquired assets, which can lead to future depreciation and amortization advantages.
• Third-Party Approvals: Certain contracts or leases may require the consent of the other party for assignment. Third-party consent may also be required when transferring licenses or permits.
• Employee Matters: Employment relationships typically do not transfer automatically; the buyer must extend new offers, and employment contracts may need to be renegotiated.
• Goodwill and Intangibles: A value may be placed on acquired goodwill, affecting the purchase price.

Stock Purchase Transactions

In a stock sale, the buyer acquires the ownership interests (stock or membership units) of the target entity. The business continues to operate with all its assets, liabilities, and contracts intact. These transactions are often less complex, since a buyer will acquire all of a business's assets and liabilities.

Key characteristics of stock transactions include:

• Ownership Transfer: Equity ownership changes hands, but the company remains the same legal entity.
• Assumption of Liabilities: All existing liabilities—known and unknown—generally remain with the entity and are thus assumed by the buyer.
• Tax Considerations: Because the buyer will inherit the existing tax basis of the business, their tax treatment may be less favorable. Sellers may prefer this type of transaction due to the way capital gains taxes are handled for long-term gains.
• Continuity of Operations: Customer contracts, licenses, employee agreements, and intellectual property rights remain in place, reducing disruptions that could affect a business's operations.
• Due Diligence: Because all liabilities transfer with the company, buyers must conduct rigorous due diligence.

Navigating Legal and Regulatory Considerations

Every transaction is unique, but several recurring legal issues must be addressed to ensure that a purchase or sale can be completed successfully. These issues may include:

Employee Contracts and Benefits

Any existing non-compete agreements or confidentiality agreements may need to be assessed. A buyer may need to take steps to ensure that key personnel are subject to enforceable restrictive covenants so that they can preserve the value of the business. Buyers may also need to determine how accrued vacation, retirement benefits, or bonuses will be handled for current employees.

Intellectual Property (IP) and Trade Secrets

A seller must establish clear ownership of patents, trademarks, copyrights, and software. Assignments must be properly recorded with the United States Patent and Trademark Office (USPTO) or other agencies. In asset purchases, IP must be specifically transferred or assigned. In a stock purchase, IP will typically be transferred automatically.

Due Diligence and Risk Assessment

A buyer may need to review financial statements, tax returns, and debt schedules. They may also evaluate employment practices, litigation history, and regulatory compliance to ensure that any hidden risks are identified. In some cases, environmental assessments may be necessary.

In asset purchases, due diligence may focus on the value of specific assets and liabilities. In stock purchases, due diligence must be more comprehensive, reviewing all aspects of a business and uncovering any undisclosed liabilities.

Contact Our Tysons Corner, Virginia Business Transaction Lawyers

When planning to buy or sell a business, the right legal guidance can protect your investment, streamline the process, and position you for long-term success. Contact our Tysons Corner business sales and purchases attorneys at 703-652-5506 to schedule a consultation.