As attorneys practicing business law in California, we are frequently asked by business owners and potential business purchasers what they need to consider if they were to sell their business or to buy a business. Although it is a very good question, it is also a complicated question.
Generally speaking, when purchasing or selling a business in California (focusing on corporations in this blog), there are two main types of transactions that can occur (excluding the concept of merger), a stock sale or an asset sale. Early on, both buyer and seller should begin discussions about which structure should be used in their transaction. By definition, a stock sale is really the transfer of the entire ownership interest of the business whereas an asset sale is really just a purchase of some or all of the assets of a business. Here are two illustrative examples that may help in understanding a stock sale versus an asset sale:
Stock Sale Example:
Person A would like to start a new business. Owner of Corporation B would like to retire. Person A would like to buy the entire business of Corporation B, including the business entity as a corporation as well as all of its assets (and liabilities). So, through their attorneys, Person A and Owner of Corporation B draft a stock purchase and sale agreement whereby all of the stock of Corporation B will be sold to Person A for a certain amount of money, a stock sale. With the assistance of their attorneys, Person A and Owner of Corporation B comply with all California laws regarding stock sales and once the stock sale has been consummated, Person A is now the owner of Corporation B, its business, and all of its assets, etc. A stock sale here allows Person A to buy the entire business intact and as a going business concern.
Asset Sale Example:
Owner of Corporation A would like to retire and close down the business. Owner of Corporation B is in the same line of work and is interested in buying the business of Corporation A. However, B does not need the business entity of Corporation A but really just wants the assets of Corporation A, e.g., inventory, client list, website, office furniture, computers, vehicles, equipment, etc. So, through their attorneys, Owner of Corporation A and Owner of Corporation B draft a purchase and sale agreement that will transfer the assets from Corporation A to Corporation B for a certain amount of money, an asset sale. With assistance of their attorneys, Corporation A and Corporation B comply with all California laws regarding asset sales and once the asset sale has been consummated, Owner of Corporation A then closes down and dissolves Corporation A and retires while Corporation B continues on with its business but with the addition of the assets from Corporation A.
So what are the positives and negatives of each type of transaction?
Well, there are too many to discuss all of them here in this blog. However, a few positives about a stock sale is that the purchaser in a stock sale typically buys all of the ownership interest in the corporation and takes control of the entire business intact and as a going concern. After the transaction is complete, the legal status of the corporation is the same except that it just has a new owner and operator. Stocks sales are ideal for preserving the entire corporation and its business operations. Another benefit is that stock sales can occur relatively quickly and certainly sooner than asset sales. Some of the potential negatives of a stock sale is that because the buyer is purchasing the entire business entity, the corporation, the buyer is also purchasing the issues or potential issues as well as all of the liabilities of the corporation. So, a buyer really needs to do their homework and due diligence on what they are buying before they consummate the purchase via stock sale.
Asset sales typically allow the buyer to just purchase some or all of the assets of the corporation and exclude the liabilities. This allows the buyer to be very selective about what they are purchasing. A negative about asset sales is that they typically take longer to complete than stock sales.
The above examples and information have been simplified just for the sake of understanding the difference between the two main ways to sell and purchase a business in California. California laws regarding stock sales and asset sales are complicated. It is highly advisable that both buyers and sellers of a business seek advice not only from attorneys but also from CPAs in order to properly structure the transaction. Anyone considering selling or purchasing a business in California should contact the Chilina Law Firm or another California attorney who practices in the areas of general business law, corporate governance, or mergers and acquisitions for further information.
Authored by Greg Chilina and Co-Authored by Karen Chilina
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