Businesses of all sizes are bought and sold constantly. In recent years, there's been an explosion in mergers and acquisitions (sometimes known as "M & A"), from start-up "dot.com" companies to big corporate juggernauts.

In the small business realm, mergers and acquisitions have become a popular way for a business to gain entry into a new market. Rather than go through the trouble of creating and financing a new business, it's sometimes better to buy an existing one.

The terms "mergers" and "acquisitions" are usually used interchangeably to describe how one business takes over or buys out another, they aren't the same things. And, if you're thinking of taking over an existing enterprise, you need to know some of the business basics of mergers and acquisitions.

Be cautious, here. Mergers and acquisitions are usually complex matters, and often they're examined closely by the federal government, particularly the Federal Trade Commission (FTC) and the Department of Justice (DOJ), to make sure that a merger or acquisition doesn't make the market less competitive, that is, reduce consumers' choice in the types of goods and prices for them. Be certain to research your transaction carefully, or seek the advice of an experienced business law attorney.

Mergers

A merger is when your business and another business (or more) join together. Each business's assets, debts and liabilities are combined into a new business, called the "surviving" business or corporation. The old business ceases to exist. Typically, the stock shares of the old business are converted into the shares of the surviving business. The name of both companies might change as well signaling a whole new enterprise.

When a merger is completed, all real estate and other property of the old corporation automatically becomes the property of the surviving corporation. Unlike in a asset purchase, there's no need to make a formal transfer in title. However, some states require you to file a certificate of merger so that ownership records remain accurate. Be certain to check the laws in your area for this requirement.

Some assets can't be transferred automatically to the remaining company. Leases and contracts having clauses barring them from being transferred or assigned to another person or company are examples. These clauses are often found in mortgages and other types of loans. In such cases, the buyer needs to take special action to get the asset, such as requiring the old company to get the bank or landlord to agree to a transfer.

In a merger, the surviving corporation takes on all liabilities, debts and responsibilities of the old business. These include internal debts owed by the merged corporation to its shareholders and employees.

State laws govern the mechanics of a merger, and vary from state to state. Corporations wishing to merge must be careful to comply strictly with the applicable laws and requirements. A merger that fails to meet these is illegal and invalid.

Acquisitions

An acquisition is when one business buys out or takes over another business. Typically, this is done by:

• Buying the other business's stock, or
• Buying its assets - monetary and non-monetary

The company remains in tact after taking over the other company, but may absorb the new company or leave it as its own operating entity.

Ways to acquire another company:

A stock purchase is when you pay the shareholders of the other business, when it's publicly traded, for their shares of stock. This is the simplest way to acquire a business. The buyer gets the assets of the business, but it also takes over its debts and liabilities. All of their assets and debts go into the calculation of how much you will offer to pay for the stock.

Usually, the seller's shareholders must approve of the sale, but the buyer doesn't need shareholder approval. Also, in most states, shareholders of the seller who object to the sale can claim appraisal rights to demand that an independent party determine a fair price for their shares.

There's no need to make a formal transfer in title from the old business to the buyer. The buyer automatically becomes the owner of the seller's equipment, inventory, and patents and trademarks by owning the stock.

In a private company, the acquiring company purchases the current owners' interest in the company and pays them accordingly.

An asset purchase is when you buy all or some of another business's assets, like equipment and inventory. Generally, the buyer does not acquire any of the seller's liabilities or debts, even when the buyer intends to purchase all or substantially all of the seller's assets. This is one of the main advantages of a sale of assets as opposed to a merger.

There are exceptions, however, such as if you agree to take over or "assume" the seller's liabilities, maybe as a tactic to get the seller to agree to the sale.

One company may also acquire another's trademarks or brands, but not any other assets of the company. This is another way to break into a new line of business without heavy start-up costs.

Questions for Your Attorney

• Is it better for me to buy a business's assets or stock?
• How long will a merger take, and can I continue to do business with my vendors and creditors while the merger is pending?
• Do I have to notify my creditors if I intend to buy another business's stock or assets?

Related Resources on Lawyers.com^sm

- Need a form? Access hundreds of Business Legal Forms that cover a range of business legal needs including Buy - Sell Agreement
- Read Asset Sales & Purchases in Mergers & Acquisitions
or access more Buying & Selling Businesses articles and information
- Read more Small Business Law articles and information
- Selecting a Good Lawyer
- Find a Business Law Lawyer in your area
- Visit Lawyers.com^sm Business Forums for more feedback and help