Robert Hirsch, managing partner at Freedom Factory, founder of Freedom Factory, discusses the different types of contracts that you can use to sell your business.
What Contract Structure do I Need to Sell My Business
Stock Purchase Agreement or Asset Agreement? What's the Difference?
Read the Transcript Below
Hello, this is Robert Hirsch from Freedom Factory, and I want to talk to you about something that sometimes you get so involved in selling businesses that you don't realize that you have all these TLAs or three letter and acronyms that people don't understand. And so I just got a letter from one of my clients and he was talking about the difference between deal structure when selling a business.
And so we're going to cover what's the difference between a stock purchase agreement and an asset purchase agreement because they're, they're pretty fundamental and often in the LOI or the letter of intent, it's going to be listed whether they want to do a stock purchase agreement or an asset purchase agreement.
And so as both a seller and a buyer, often if you don't know which one to do, and I'll give you exceptions to the rule before we get through the entire video. But I like asset purchase agreements and there's some fundamental differences, and I'm going to go into those right now. So an asset purchase agreement means you're buying the assets of a company.
So you're going to set up another shell company and are going to buy the assets and you're going to put it in there. So. Uh, for example, when I was buying a, I personally bought a boat company I boat manufacturer for, for fly fishing. And many of you that know me know that I love to fly fish and we're up here in my mountain house right now and it's a raining day.
And I decided it's probably good to get some work done. So I bought it with an asset purchase agreement. And so when you do that, all you have to do is just get the assets of it and put it in there. So the differences are the liabilities of the old company. Don't transfer. So if they owe the bank $100,000 you buy the assets and you put them in there and they're unencumbered, and then they have to pay off the debt.
Obviously, if somebody has a loan on it, you can't sell the assets out from under them. So they're going to have to clear that debt with the proceeds and we can handle that in escrow. But an asset purchase agreement is means you're just buying the assets of a company. So it's not your job to find every liability that they have that sticks with the, with the other company.
So conversely, if you do a stock purchase agreement, now the due diligence is much harder. You have to find all the debts of the company, and often they, you can make promises or reps and warrants in the contract of what that means. But a stock purchase agreement means you're buying all the assets, all the liabilities of the company.
And sometimes you can do things like have the seller warrant certain risks and there's ways to do it, but stock purchase agreements are much more complicated. 80 to 90% of the deals that we see on high growth lifestyle companies are asset purchase agreements. Sometimes with our bigger companies, or they have a lot of IP or licensure, intellectual property.
And licenses. Stock purchase agreements make more sense. For example, uh, if you bought a company and it had a lot of licensure, let's take the boat manufacturer, right? We were licensed as a U S coast guard, uh, approved manufacturer. We were a boat dealer. We also were a car dealer because we had to put tags on the trailers for them to drive it home.
And we were ironically an auto manufacturer because we had to make the trailers and put a VIN on it. So that's a lot of licensure. It's a lot of one to three day classes, uh, that we had to take. So in that circumstance, when there's a lot of licensure, you can, if you want to, you can do a stock purchase agreement and the licenses transfer with the company.
Again, you have to be a little bit more careful about your diligence and making sure that you identify all the liabilities that the company might be exposed to. That includes environmental risks and business risks. So if you're not sure what to use, 80 to 90% of the. At the time, I would really recommend an asset purchase agreement.
If it's a company with less than $20 million in sales. There's obviously exceptions to it, and if you have any questions about what those exceptions are, what it looks like, why don't you just give us a, call it at freedom factory. You know, we have, you know, great middle of the fairway S PAs and APA has their stock purchase agreements and asset purchase agreements you can take to your attorney.
At Freedom Factory®, we have experienced and witnessed the explosive results of entrepreneurs aligning passion and purpose to create extraordinary value. However, most entrepreneurs have no idea how to maximize the value of their business and move on to the next chapter of their lives. That’s where we can help.
Freedom Factory® has radically disrupted the way high-growth, lifestyle companies are bought and sold, which historically was a horribly inefficient market. When I sold my first company in the 1990s, I went to several investment banks and sold my business to one of less than five companies they called. Looking back, I see exactly how much money I left on the table and knew that there had to be a better way. The bottom line is that entrepreneurs don’t speak banker, and bankers sure don’t speak entrepreneur.
https://tylertysdal.academia.edu/
Contact Tyler Tysdal at Freedom Factory
Freedom Factory
5500 Greenwood Plaza Blvd., Ste 230
Greenwood Village, CO 80111
Phone: 844-MAX-VALUE (844-629-8258)
https://freedomfactory.com/about-tyler-tysdal/
Freedom Factory Managing Partners
Tyler Tysdal https://www.linkedin.com/in/tyler-tysdal
Robert Hirsch https://freedomfactory.com/about-robert-hirsch
Who is Tyler Tysdal?
Tyler Tysdal is a lifelong entrepreneur who first discovered the joys and challenges of self-employment at the age of 14. Tyler Tysdal was a collector and trader of baseball cards and his budding entrepreneurial spirit spurred him to create Triple T’s Sports Collectibles, a national mail-order trading card and memorabilia business that found a wide audience through ads in trade magazines. While market inefficiencies were numerous in this pre-internet era, a young Tyler Tysdal experienced his first big business win with $14,000 a month of profit result. A lot of money for 14. It hit him during a ride with his mom to the post office to mail dozens of card shipments: He would likely be an entrepreneur and investor the rest of his career.
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