Outline For Acquiring A Business

Essay by EssaySwap ContributorUniversity, Master's February 2008

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1. There are two primary options for buying a business, purchasing the shares of the corporation and purchasing the assets.

a. In the first, the ownership, vested in those holding the shares changes hands and as a result, control and ownership of the company changes with it.

b. In the second option, you would create an entity of your own and it would purchase the assets from the other corporation. At the completion of the transaction, the other corporation would have nothing inside of it other than the cash you paid for the assets. One of the assets you would be purchasing, assuming you wanted it, would be the name. As a result, coincident with the closing of the transaction, the selling entity would change its name allowing you to change yours to it.

2. There are issues/reasons why you would choose one of the options rather than the other a.

Purchasing the assets allows you to avoid any unknown liabilities that the seller has. If you purchase the corporation, by acquiring its shares, and sometime later it comes to light that the company has an exposure to a lawsuit for events which occurred prior to your acquisition, you will be exposed for that. If on the other hand, you have purchased the assets, out of the corporation, the liability for this kind of thing stays with the seller (unless the liability is associated with the assets you purchased like in the case where you the assets include storage tanks which may pose an environmental exposure).

b. You told me that there is a union involved. The union will have a contract with the company which spells out the terms of employment for its members, including things such as hours, wages and benefits. Purchasing the assets would result in the seller laying off all of these employees, which presumably you would hire. Doing so probably exposes the seller to liability for contract termination or severance which they would want covered by the purchase price. By purchasing the shares, the old corporation remains intact, and the union contract continues uninterrupted. You also may want to terminate the contract, particularly if you believe you can negotiate a better one-this would be another reason not to buy the shares, but purchase the assets instead. At the same time, it may be best to keep the contract in tact and that would be a reason to purchase the shares.

c. Regardless of which approach you choose, the agreement will need to contain some Representations and Warranties from the seller. These are specific provisions which confirm key elements of the deal and provide recourse in the event that things are not as you expected.

3. Effecting the purchase and financing the deal-You said that your group has one third of the money necessary to complete the transaction which means that you will need to come up with the other two thirds. There are a number of options for doing this including getting the seller to finance the balance, other debt financing or equity financing. Some quick comments on each are below.

a. In some cases the seller is willing to finance the balance of the purchase.

i. Depending on whether you are purchasing the assets or the stock will determine who the seller is. If you purchase the stock, you would have an agreement with the existing shareholder(s) under which you would make a one-third down payment and then pay them the balance over some period of time. This would not be workable if there are a number of shareholders on their side, because it is unwieldy.

ii. If you are purchasing the assets, the agreement would be with the corporation, on their side. In other words, you would have an agreement with their corporation under which you would make the one-third down payment and then pay the balance over time.

b. Other Financing i. You may be able to get a lender to loan you the money to complete the transaction. In this case, your group would own the entire company even though you only came up with one-third of the money, however you would be obligated to service the debt.

ii. Depending on the financial state of the business and the tangible assets it has, you may be able to get a lender to loan the money to the business. If this was the case you could purchase one-third of the shares from the existing shareholders, cause the company to borrow the rest of the money, by pledging its assets as collateral, and then the company would purchase the remaining two-thirds of the shares from the original shareholders. So for example, if there were 6,000 shares outstanding prior to your group getting involved, you would purchase 2,000 shares and the company would purchase 4,000. Because the company purchased the 4,000, the only shares outstanding are the 2,000 leaving your group owning 100% of the shares.

c. Issue additional shares i. You could sell shares to investors in order to raise the capital necessary to complete the transaction.