I Want It All – Stock Purchases

Written by James Sanders

After reading last week’s update on asset purchases, why would you do a stock purchase?  Sometimes a buyer wants to acquire all of the attributes of a company.  For example, if a company has government contracts or is a preferred supplier for a large enterprise, you could potentially lose that business and have to reapply if a new company takes over.  In these types of cases, a stock purchase makes sense. 

The key components are below: 
Ownership Transfer:
The buyer effectively becomes the new owner of the company, taking over the ownership stake of the previous shareholders.

Acquisition of Assets and Liabilities:
The buyer acquires all of the target company’s assets, including tangible assets like property and equipment, as well as intangible assets like intellectual property and goodwill.   Additionally, the buyer assumes all of the company’s liabilities, both known and unknown, including debts, contracts, and potential legal obligations.  The unknown liabilities is a big source of risk.  

Legal Entity Remains:
In a stock purchase, the legal entity of the company remains intact. The company continues to operate with the new ownership (i.e., the buyer).

More Efficient Process:
Stock purchases are often considered a more straightforward and efficient method of acquiring a company compared to asset purchases, as it typically involves a single transaction rather than the acquisition of individual assets.

Risk and Reward:
A stock purchase can be advantageous for the buyer if the company is performing well and has a strong future outlook, but it also carries the risk of inheriting unknown or unexpected liabilities.

Due Diligence:
Before committing to a stock purchase, the buyer should conduct thorough due diligence to assess the company’s financial health, legal obligations, and potential liabilities.  The tax consequences are also a key item to assess.  

Please make sure you discuss and assess entering into this type of transaction with your professional business advisors.  They can help reduce or protect you from many of the unknown risks.  Wanting the whole company means you are getting everything.  

Next week, we will talk start to dive into different types of mergers.