Stock Sales: Buyers Beware
Posted Monday, January 28, 2013 by Michael A. Larson
A person must do their due diligence when buying a company, especially when the purchase is done through a stock sale. Generally, there are two ways to buy a company: one is through the purchase of the company’s stocks; the other is through the purchase of the company’s assets. Each type of transactions has its pros and cons. However, sellers usually prefer a stock sale since it not only allows them to step away completely from the business, but it also offers tax incentives such as being taxed at a lower capital gain rate.
A stock sale transaction may seem simple, generally only requiring the shareholder to endorse the back of his or her stock certificate. However, in actuality, the sale of stocks is not a simple transaction at all, and requires much thought and consideration on the part of the purchaser, prior to the actual sale. This is because when a person is purchasing stock from a corporation or shares in an LLC, they are essentially purchasing the underlying business, and will therefore, be responsible for all of the liabilities of the company being acquired. Examples include federal and state tax obligations, pending claims and lawsuits from the failure to pay employees and vendors to warranty and other claims.
Therefore, in order to protect themselves in such a transaction, the purchaser must always remember to perform their due diligence, which includes properly researching and valuating the business, and requesting adequate representations and warranties from the seller. If you are thinking of selling or purchasing a business, give me a call. With years of experience under my belt, I can guide you through this process efficiently and most importantly, correctly.
For more information, contact Michael Larson at (206) 340-1131.