By: Sofía Escribá
One way to generate business growth is through inorganic growth and this means identifying a business that is successful and generates significant cash flows and investing in that business.
When an entrepreneur identifies an investment opportunity they ask themselves several questions, including the following:
Do I want to buy the whole business or just a part of it?
If I am buying only a part, do I want to buy a controlling position[1] or can it be a non-controlling position? Am I going to be involved in the management of the business or do I want to be a passive investor?
If I am going to buy the whole business, which is more convenient for me, to buy the shares of the company that operates the business or to buy the assets?
In this article we will give some advantages and disadvantages of the options raised in the last question.
Subject | Purchase of Assets | Purchase of Sotcks |
| Liability | The buyer’s liability for anything that happened prior to the date of purchase and that happened while the seller controlled the business is limited. Most likely, any lawsuit will be brought against the seller’s partnership that operated the business. | In the event of a lawsuit or a problem with the partnership after the purchase, the partnership will be liable and therefore the buyer will be affected. In stock purchase agreements, this liability is limited by making the seller liable for anything that has happened prior to a certain date (usually the date of sale) but this implies that the buyer must initiate a lawsuit against the seller to recover the damages he has suffered. |
| Permits | In case the business being purchased requires many permits and authorizations, the purchase of assets may not be an option if the business cannot operate without these permits. This is because after the purchase it will want to operate immediately and if it cannot operate without permits, then we will be in trouble. In case the business can be operated while the assignment of the permits is in process, this option can be considered. | In case the type of business cannot be operated without permits or while permits are pending, then a purchase of shares and not of assets should be considered. Some examples could be hydroelectric or mining projects. |
| Facility | The purchase of assets requires more documentation, as it will depend on what type of assets are being transferred to see how many contracts need to be signed. For example, one contract will be required to be signed for the transfer of real estate, another for the transfer of vehicles and another for the transfer of machinery and equipment, as each of these contracts is filed with different entities (with the exception of the machinery and equipment purchase and sale contract). | The purchase of shares is generally done through a single contract, but the negotiation of such contracts is usually more complex due to the allocation of responsibility between the parties. |
| Due diligence | The due diligence process through which business contingencies are reviewed in the purchase of assets is usually simpler and quicker since, as indicated above, the responsibility for anything that occurred prior to the sale is the seller’s. The due diligence process for the purchase of shares is generally more complex since it seeks to identify contingencies, so that the parties can negotiate the allocation of responsibilities and ways to guarantee the outcome, such as escrow agreements. | The due diligence process for the purchase of shares is generally more complex since it seeks to identify contingencies, so that the parties can negotiate the allocation of responsibilities and ways to guarantee the result, such as escrow contracts or retention of part of the payment of the price. |
Both the purchase and sale of assets and the purchase and sale of shares have advantages and disadvantages and therefore it is our job as lawyers to analyze the business to be purchased and understand our client’s concerns in order to make the best recommendation.
For further information please contact our Corporate Law specialist, Sofía Escribá at sescriba@consortiumlegal.com.
[1] Generally we refer to more than 50% of the voting shares of the company in question.