Q: My agency is about to acquire a competitor. I
have heard that a buyer should always acquire the assets of a
business, as opposed to its corporate stock. Do you agree, and, if
so, why do big corporations almost always buy stock instead of
assets?
A: I agree that in the absence of special
circumstances, you should acquire assets and not corporate stock.
In my experience, 95% of acquisitions of travel agencies are asset
acquisitions, as they have three key advantages for buyers:
First, buyers can purchase assets usually without assuming the
seller's liabilities. For example, you are not liable for debit
memos for tickets issued before closing, and you do not have to
assume the seller's office lease or CRS contracts.
However, if you take over the office and the CRS equipment, or
if the seller is insolvent and you pay less than fair value for the
assets, the landlord, CRS vendor or other creditor of the seller
could sue you under various legal theories.
Second, asset buyers can depreciate the purchased equipment and
furnishings and can amortize the purchased goodwill, taking tax
deductions each year for a portion of the purchase price.
On the other hand, stock purchasers generally cannot deduct any
portion of the stock price, just as you cannot deduct your purchase
of stock in a publicly traded company.
Third, when you purchase assets, you can make the seller's
location a branch of your travel agency, eliminating the need for a
separate ARC bond or letter of credit. When you buy stock, the
acquired agency remains a separate corporation, which must
therefore maintain its bond or letter of credit in effect.
Big corporations usually buy stock simply because they do not
want to have to go through the hassle of obtaining assignments of
all of the seller's contracts and leases from the seller's numerous
vendors, landlords and employees under contract.
The assignment process could take months or years, whereas a
stock purchase can be consummated in a few weeks if both parties
hurry.
To guard against the seller's undisclosed liabilities, big
buyers conduct so-called "due diligence" reviews of the seller's
entire business.
Though most travel agency acquisitions are asset purchases, I
would advise you to consider a stock purchase if the price is right
or if you have no other choice.
However, you should be sure to conduct your own "due diligence"
review and to make sure that you can deduct undisclosed liabilities
from the purchase-price installments.
Mark Pestronk is a Fairfax, Va.-based attorney specializing
in travel law. He answers your questions in the Crossroads' Legal Issues Forum.