If you are looking to know what the different types of Merger and Acquisition Agreements are? You are at the right place.
When it is time to buy a business and sit down to make the deal, there are essentially two different types of merger and acquisition methods.
The first is an Asset purchase, and the other is a Stock purchase. However, a third type is emerging. It is a hybrid of sorts, where the purchase is treated as a stock purchase, but the structure is taxed as an asset purchase for tax purposes.
The difference is actually in what is being bought and sold. This involves an in-depth understanding of buy/sell agreements. In the case of an asset purchase, certain assets of the business are being sold, but the business entity itself remains intact.
Which one of these is right for you? Quite simply, it depends.
Here are some of the details.
Asset Purchases
Buyers generally favor these types of purchases. The reason is that they can pick and choose the assets they wish to purchase, including equipment, client lists, and accounts receivable. The buyer does not have to purchase items such as aging equipment, an unfavorable contract, or pending litigation.
There are also certain tax advantages to a buyer in an asset purchase, one of the primary reasons they prefer this method.
Stock Purchases
The seller usually prefers a Stock purchase due to the tax advantages. It also allows the seller to “walk away” from the business without having to deal with certain residual future obligations to the business operations. The buyer essentially steps into the seller’s shoes, and this means they assume those future responsibilities.
A buyer might prefer a stock purchase in some cases, though. For example, as often applies in California, the business may need a specific license or permit to operate. Additionally, it is often easier for the buyer to retain clients and contracts when the transaction involves a stock purchase. In this case, it is essential to ensure that the terms of the contract and the sale permit this transition in the purchase or legal agreement.
The Hybrid Purchase
There are several reasons to arrange your business purchases in this hybrid method. This method treats the stock purchase as an asset purchase, and there are several ways to do so. There are essentially three ways to “elect” or choose this method, regulated by the IRS. Each has specific requirements regarding the type of company that can make the purchase. Additionally, there are different tax rules applicable to each type.
They are labeled as the 338(h)(10), primarily concerned with an S-corporation stock. Then, 338(g), an election that can only be chosen by the buyer due to some double-taxation requirements. Lastly, 336(e) blends some elements of the other two methods but has its own restrictions.
Confused? It is understandable. The laws governing these sales can be challenging to navigate. The key is that the buyer and seller must understand the tax consequences of each election. For instance, in the case of 338(g), the seller generally requires the buyer to increase the purchase price to cover taxation costs.
Need help with the different types of Merger and Acquisition Agreements?
Selling a business may seem like a complicated process, and it is. There are several nuances beyond the type of Merger and Acquisition methods you choose to use. The best thing you can do if you have a business for sale in California is to contact Rogerson Business Services, which will help you not only find the right buyer at the right time but also structure the sale most beneficially.