The common rule of thumb seems to be that when a buyer wants to purchase a business only an asset transaction should be considered. But is this rule cast in stone? There can be occasions where the buyer is well justified in considering a transaction to purchase stock rather than to purchase assets. For example, there may be important contracts being acquired that the buyer does not wish to renegotiate in the name of the purchasing entity. Or there may be numerous assets that would have to be re-titled. Or there could be some tax attributes that the buyer wishes to preserve.

Since taking on unknown or understated liabilities is always a concern in a stock purchase transaction, does the buyer have any way for protection in the case of a stock purchase? Fortunately, the answer is yes. Here are a few ways to obtain some protection. Provide for a holdback of some portion of the purchase price in a protected escrow account for a period of time to cover concerns over undisclosed or understated liabilities. If there is a deferred portion of the purchase price, provide for a right of offset in the promissory note. Require an indemnification agreement from the principal selling shareholders.
So if the need for a stock purchase transaction is there, there are certainly ways to accommodate the buyer and offer protections as well.

Michael W. Margrave
mmargrave@mclawfirm.com
480-994-2000