Selling a Business: Stock Purchase, Merger, Or Asset Sale?
In selling a business, a top factor to consider is the structure that the entire transaction should have. Here, structure refers to terms such as asset sale, stock purchase and merger. Structure means the type of transactions. It’s important to know the type of transaction you wish to pursue for your business. Each type has unique advantages and disadvantages. Apart from deal structure, other issues that are worth understanding include:
Signing non-disclosure agreements
Compliance with the relevant legislation
Transitioning to life once the transaction is complete
Signing the Non-Disclosure Agreements is mandatory if you want to guarantee the confidentiality of all the parties involved in the transaction. The reason for this is to dissuade buyers who come across sensitive or confidential information from disclosing this to other people. Checking the company’s compliance with the relevant legislation and regulations ensures that it’s ready for sale. Back to the issue of the type of transaction, here’s what you have to know:
Merger
Merger refers to two companies joining forces to become one entity. There are different types of mergers with the most common being ‘reverse triangular merger’. Under this type of merger, the buyer assumes 100% control and ownership of the newly formed company. Those who sell their stocks or shares to the buyer end up with a deal payment. The main advantage of a reverse triangular merger is that the deal can proceed even with the consent of a few stockholders. However, reverse triangular mergers can often be complicated.
Stock Purchase
Under this type of transaction, the prospective buyer simply approaches all stockholders directly with the intention of purchasing stocks. Everything about the company remains the same. The only difference is now new owners are in place. Stock purchase is one of the simplest and most straightforward structures. It’s perfect when dealing with only a few stockholders. It saves the buyer from forming or creating merger subs. Its main disadvantage is that buyers must contact all stockholders for the transaction to proceed.
Asset Sale
An asset sale is one of the most unique types of transactions for entrepreneurs who wish to sell their companies. Here, the buyer is not interested in purchasing the entire company. Instead, the buyer’s objective is to place bids for selected company assets. The company continues to exist in its current state even after selling its assets. The main attraction with this type of transaction is the buyers only choose the assets they find the most impressive. However, it’s a waste of time and money for buyers who want to buy one line of business.
What do I do now?
Contact us if you would like to have more information on selling a business. Our lawyers at You Legal will be happy to assist you in whatever way we can.
* This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.