Introduction to Mergers and Acquisitions

When buying or selling a business the transaction will generally be structured either as an acquisition (by way of an asset purchase or a stock purchase) or as a merger.

Asset Purchase

One of the easiest structures for buying a business is to purchase the seller's assets, free and clear of any and all liabilities. The purchaser is not actually buying the business entity itself, but instead will acquire the businesses name, goodwill (business relationships), equipment. Thus, an asset purchase is much like buying the seller's inventory and equipment without the necessity of being saddled with the liabilities that seller may also have.

Often, a buyer may prefer an asset purchase agreement for one or more of the following reasons:

The buyer has the ability to acquire assets only, without assuming any liabilities of the seller. More likely, the buyer will pick and choose which assets to acquire and which liabilities to assume. For instance, the acquisition of certain intellectual property (“IP”) rights or lease rights may be central to the buyer’s desire to purchase. Acquiring such rights, however, often entails a willingness to assume certain corresponding liabilities. And, conversely, from the seller’s perspective the seller can choose which assets to sell and which to keep. For instance, it is not unusual for the seller to retain cash, certain receivables and sometimes some select IP rights.

The buyer receives a "stepped-up" tax basis on the assets being acquired based upon the allocation of the purchase price.

The buyer will typically retain the option but not the obligation to hire some or all of the employees of the seller's business.

The buyer also has the ability to pick and choose which contracts to assume.

Stock Purchase

In simple terms, a stock purchase may require only that the selling shareholders swap their stock certificates for a check from the buyer. In contrast to an asset purchase, the buyer is actually taking over the seller's entity and everything it owns and owes, and not just purchasing its assets. In essence, the buyer steps into the shoes of the selling shareholders.

Sellers will usually prefer a stock purchase agreement because of favorable tax treatment of this type of transaction. They may be able to realize capital gains treatment on the sale of stock. This avoids "double taxation" that can result with an asset purchase where the business entity is first taxed on sales proceeds, and the shareholders are then taxed again on distributions that may then be made to them.

The result can be a seamless change of ownership. The "business entity" may look like it is under new management but title to corporate assets and everything else can remain the same. Thus, there is a better chance of preserving the status quo. Employees can remain in place. It may not be necessary to change title to assets or assign existing contracts to a different business entity. Good will and other intangible assets remain with the seller's business.

Buyers are wary of stock purchases because they end up assuming liabilities of the seller. Thus, a seller must anticipate that a buyer will expect some concessions. The buyer may, for example, insist on very strong indemnification language from the seller or may require that funds from the purchase may be set aside in escrow to satisfy “unforeseen liabilities.” The purchase price may also be adjusted accordingly.


A merger is a combination of two or more business entities. It has many of the characteristics of both an asset purchase and a stock purchase. In it’s simplest form a "surviving" company will issue cash, new stock or a combination of cash and stock to shareholders of a "disappearing" company in exchange for the stock in the disappearing company. The surviving company then takes title to all the disappearing corporation's assets and liabilities, and the disappearing company ceases to exist. While mergers can proceed in various different forms depending on specific needs, objectives and circumstances, in general the following observations apply:

A merger is the time-tested transaction vehicle for recognizing the strength of combining two or more business entities into a single venture.

A merger can allow for the recognition of economies of scale. While employees in duplicate positions may be laid off, the intent is often to improve the bottom line by cutting overhead and increasing efficiencies.

Tax consequences can be neutralized or deferred. Properly structured, swapping stock will not result in any taxable gain to the shareholders of either of the merging organizations.

A merger can be a particularly useful where certain contractual relationships of the target need to be preserved in order for the buyer and seller to realize full value from the transaction.

Regardless of the structure, we will use all of our business law experience to help you to accomplish your goals.