Thursday, April 9, 2009
I have a client who sent me a Letter of Intent that she has received for the purchase of her business. It struck me, as I was reading through it, that the potential purchaser did not understand the ramifications of his own offer. He started out offering to buy all of the shares of the corporation that my client owns. But the body of the offer looked more like an asset purchase. He did not want to assume any liabilities of the business and he wanted to pick and choose which employees stayed on and have my client fire the rest and be responsible for severence packages. What this purchaser did not understand is that, if he is purchasing all of the shares of the company, he inherits the liabilities and employees. The corporation is a separate legal entity and it stays the same, regardless of who the shareholders are behind it. The upside is the purchaser can have a seemless transition where no one even has to necessarily know that ownership of the company has changed, the downside is that, with the company, comes its history, its liabilities, and its employee seniority. Knowing the difference between a share purchase and an asset purchase and assessing the pros and cons of each before making your offer, makes good business sense.