When one business purchases another business the use of an acquisition agreement is critical. While these transactions can vary greatly based on the size and type of business, there are two types of acquisition agreements used – an entity purchase and an asset purchase agreement. The type of acquisition agreement that is appropriate for your purchase will depend on a number of factors.
An entitle purchase agreement is used when the buyer purchases the stock majority of another business thereby purchasing the business entity. The new business owner steps into the business carrying on where the previous owner left off. When two businesses merge they can carry on doing business as a single entity or as two separate entities.
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An asset purchase agreement occurs when the buyer purchases tangible and intangible assets. The shell of the business being purchased remains with the original owners. This is actually the preferred agreement when a sole proprietor or partner owned business is purchased. Which acquisition model is the one you should use? There are two things to think about when deciding on an acquisition model: liabilities for debts and obligations, and taxes.
From a tax perspective an asset sale is generally the best option for the buying business because they can begin to depreciate the assets much sooner. From the selling businesses point of view there is a preference for an entity purchase because they will pay taxes on long-term capital gain rates.
With debts and liabilities buyers usually prefer asset sales because then the buyer isn’t responsible for the businesses existing debts unless that’s the agreement that was made. With an entity sale it’s assumed the buyer will be responsible for all liabilities. The acquisition method you choose will also affect the manner in which ownership is transferred to the buyer.
Get Assistance With Your Acquisition Agreement
If you are considering the use of an acquisition agreement in the purchase of another business the process is complicated and it’s advised you hire an experienced business attorney to work through the early negotiations and then draft the formal agreement for you.
Because your existing business is buying another business there’s a lot at stake and you should not put your existing business at risk. The cost of an experienced business attorney is nothing compared to what you are at risk of losing if the acquisition paperwork is not properly handled.
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