Growing Your Business through Acquisition

By: Anthony L. Barthel

I want my business to grow – should I consider buying another business?

Despite all of your hard work you may find yourself wondering why your business can’t grow any bigger or faster. Countless resources are available to the business owner and entrepreneur offering methods to grow business. Perhaps the most efficient method to increase volume and gain efficiencies is to acquire an existing business that is similar to or that complements your own. The right business will supplement your existing product or service lines or will create operational or sales efficiency. The wrong acquisition can create a diversion from an otherwise healthy business, or worse, jeopardize the existence of the business itself.

Acquisitions take a number of different transactional models and the manner in which they are completed are virtually endless. The most common approaches to acquiring an existing business are through an asset purchase, a stock purchase or a merger. Each approach has its unique advantages. Based upon the goals of the buyer and the seller, one of these methods can be employed to reach the desired result.

What should I know about an asset purchase?

An asset purchase is the simplest form of an acquisition. Essentially, all or part of the operating assets of an existing business are purchased and made a part of another business. This type of acquisition can include the purchase of all or any one of inventory, equipment, accounts receivable, intellectual property, customer lists, contracts and goodwill. This approach is flexible as it allows the acquiring business to pick and choose which assets it wishes to acquire and disregard assets that do not add any value to its existing business. Done properly, this type of acquisition allows the purchaser to leave liabilities with the old business, thus providing a reasonable measure of certainty as to potential future claims. Asset purchase agreements should clearly state the assets to be purchased and those assets to remain with the old business. The agreement should also contain certain representations and warranties as to ownership of the assets by the Seller. The sophisticated buyer should also obtain certain indemnifications from the seller, assuring that claims against the business arising before the purchase are not the buyer’s responsibility. The purchase agreement should also consider an ongoing relationship with key personnel of the old business for transition purposes and should contain certain protective provisions such as non-competition agreements or non-solicitation agreements. Finally, the buyer and the seller must come to an agreement on the allocation of the purchase price - a part of the agreement that can have serious tax consequences for each party at the time of sale and for years to come.

What should I know about a stock purchase?

A stock purchase can provide for a seamless transition of a business. The sale of stock can be accomplished quickly, provided due diligence can be performed on an expedited basis. Essentially, this approach allows one person or a group to step into the shoes of another and operate the business. Unlike the asset purchase, the liabilities of the business continue – therefore, if there is a need to create a liability barrier with creditors, this approach may not be an appropriate acquisition strategy. Like an asset purchase, a stock purchase agreement can bargain for certain representations and warranties by the seller as well as certain indemnifications. An added benefit to this approach is that all assets of the existing business remain with the existing business, adding efficiency to the operations. For example, if the existing business had a number of valuable contracts, the contracts would not have to be assigned to a new owner and the administrative burden of accomplishing this task can be avoided. Stock purchases promote continuity and in some cases trade name or brand recognition advantages.

What should I know about a merger?

Mergers are a complex form of acquisition and often involve multiple parties. Mergers are often used on a tax-free reorganization basis that makes them particularly attractive to business owners. Mergers can take multiple formats and may include the transfer of stock, property or money or any combination of these. Mergers can be also used effectively to remove problematic owners by providing a forced buyout mechanism that allows similarly-minded companies to join forces and leave dissenting ownership behind. Attempts at a merger should not be undertaken without the proper legal and financial guidance.