business buying another business out- Assett Purchase agreement???

Discussion in 'Growing and Managing a Business' started by AWLA, Aug 10, 2011.

  1. AWLA

    AWLA
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    Good Morning!

    We are a LLC and there is another LLC that is a neighbor. We are both service based companies doing very similar services with clients that pay for the service. We are looking at buying out his eguipment and then moving the clients over under us after the "buyout". His clients do have a contract with his company if that makes a difference.

    My question is what legal "vehicle" do I do this with? Do I use an Assett Purchase agreement? I would prefer not to totally buy his company out- as in a buyout - in case there are any legal issues from their past. Or do I go through with a buyout or merger with legal precautions?

    Pros and cons of each?

    Any help would be Great.

    Thanks!
     
  2. ArcSine

    ArcSine
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    As you've surmised, doing an "assets" deal allows you to generally avoid assuming whatever skeletons they may have lurking in their closet. Another plus is allowing you to more or less cherry-pick the assets you want while leaving unwanted assets out of the deal (if the seller has no problem with such an arrangement). So far, so good.

    Of course, few things are absolute. In certain situations, the laws of some states will shift certain of the seller's liabilities over to the buyer of the assets, even if such liabilities aren't specifically assumed in the deal. This is generally intended to protect creditors from having the assets (which largely provide the protective cushion that they're depending on for their eventual repayment) yanked out from under them, leaving them holding an empty bag. Granted, these are uncommon outcomes involving specific fact-sets, but if your particular situation gives you concern over this possibility, a chat with an attorney in your state mightn't hurt.

    Also make sure the seller has proven to you that he (or his LLC) has the legal ability to transfer title in the assets to you. If the LLC has some debt / loans on its books which are collateralized by the assets, you'll either have to (1) pay off the debt first; or (2) assume the debt; which one is at the lender's discretion.

    Also make absolutely certain that the customer contracts are assignable / transferable. Many such contracts are not, since a customer who signs up for a service arrangement frequently doesn't want to be "switched out" to another provider, at least not without his consent.

    If the number of items you're buying is minimal, then having to transfer title for each one may not be too burdensome. But in an asset deal, individual title transfers have to be drawn and executed for each item, and that can burn up a lot of time and legal fees if the sheer number of assets is large. In a merger, OTOH, titles to all assets automatically transfer to the acquiror as a function of state merger law.

    Generally the reason for structuring it as a merger or equity acquisition is to obtain ownership of assets in the face of some of these transferability restrictions I've mentioned. If you've cleared the above points and hurdles with respect to the transferability of the desired assets, then it sounds like an Asset Purchase Agreement would accomplish your objectives.

    I'll touch on the tax diffs, but all I can do is bring up the point. There are differences in the tax consequences of an asset deal vs a merger or equity buyout, but these differences are highly individualized to the situation at hand. Very generally speaking, Buyer prefers an asset deal while Seller prefers a stock deal, all other things equal, considering the tax diffs alone. If this deal involves enough dollars, it might not be a bad idea to put the facts in front of a tax advisor. He / she can (1) explain exactly how, and by how much, the tax consequences would differ, for both you and Seller; and (2) perhaps help you structure the deal so that you give Seller a few tax advantages in exchange for a price reduction.

    Best of luck with the 'marriage', and don't let all my 'fine print' yakking above be a wet blanket. It's just the necessary stuff you have to slog through to avoid getting bitten later, but the bigger picture is to keep building your business to greater successes. Cheers!
     
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  3. AWLA

    AWLA
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    I appreciate your response, It was what I was looking for. some clarity...

    So a merger is not necessarily a bad idea? There are 200+ or so assets to individually transfer in an asset purchase agreement.

    Our main concern were the contracts. They are 2 year contracts with many having more than a year left. I would hate to buy it without the contracts - (even most would stay with us- as they have minimum choices) but its the security of having the income from them to offset the overall costs.

    So my options are 1. Asset Purchase Agreement 2. Merger 3.Buyout? -I am asking as I am uncertain. I assume a buyout and merger would be the same?

    Thanks!
     
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  4. ArcSine

    ArcSine
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    Yep, those are the three fundamental ways by which you can obtain the assets and business operations of the other LLC.

    "Buyout" is a vague term that can refer to a variety of arrangements, but in your case it would mean acquiring at least a controlling %age of the other LLC's equity. There are a couple of ways to bring that about, but the most straightforward is to purchase a sufficient amount of the other guy(s)' LLC shares to give you a controlling ownership position. You might consider buying less than 100% if you want to keep the sellers on as minority partners; otherwise you (or they) may just want a full 100% sale.

    If you personally purchase the other LLC's equity, then the two LLCs fall into what's called a "brother-sister" arrangement. You personally own and control both companies.

    If on the other hand you have your LLC purchase the other company's equity, then it creates a "parent-subsidiary" structure, with your LLC owning the other one. (Which one of these two basic buyout arrangements would be preferable may simply turn on the tax consequences; there may in fact be no significant difference. A tax advisor with all the details in front of him could give you the word on that.)

    With either form of the buyout, the other LLC remains in existence, except with you now in control and ownership of it. The acquired LLC still owns its assets and remains the obligor on its debts. Obviously this eliminates the hassles of transferring titles on the multitude of assets, as well as the related issue of getting lenders' approvals for such transfers. The downside is the one you've already mentioned: when you buy the LLC you buy the whole enchilada, including any liabilities (disclosed, known, or otherwise).

    But before pulling the trigger on such a deal, check all the other LLC's contracts and loan docs very carefully for "change of control" clauses. Some loans have provisions whereby they become immediately due in full in the event that the ownership of the borrower (the other LLC) changes hands. You might thus have to renegotiate or refi those loans. Similarly, make sure the LLC's other contracts and leases are not written such that they terminate with a "control change" event.

    Following the buyout you could still merge the two entities under your state law. Or you could just continue to own and operate them as separate entities, if the previously-discussed difficulties with mergers would be too burdensome.
     
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