Does an E-2 Treaty Investor, acquiring an existing company, buy its assets or its stock?
If you are acquiring an existing business, you buy its assets not its stock, unless there is a compelling reason to do the latter.
How to buy a business
Let’s say you wish to obtain the E-2 Treaty Investor Visa. You have decided the investment will take place as the purchase of an existing business, rather than building your own business from scratch. You may learn that such business is owned by a corporation, even though it is small and operated by a single individual. In the United States, this is not uncommon.
You can choose to “buy the business” by buying the owner’s stock (from the owner), or buying all or a selected portion of the assets (from the corporation that owns them).
We recommend you buy the assets
Buying all the stock of a company that owns and operates the business is certainly the cleanest and most efficient way to take control over an existing business. Unfortunately, ou will own the business in every respect: it’s liabilities, known or unknown, its exposure to risk, present and future, and all of its existing relationships, including the toxic ones, with vendors, employees, all levels of government, the Internal Revenue Service (the U.S. tax service), law enforcement agencies, its creditors, and the general public. For years after your purchase, people may come to your door presenting your new company with demands, allegations, claims, and even threats. You will say you did not own the company when the problems occurred. They will say it is completely irrelevant who owned the company then, and who owns it now. And they will be 100% correct.
How this is done
Yes, you can buy the business by buying the specific assets you want and name. These could include physical assets such as land, buildings, equipment, furniture, furnishings, vehicles, and inventory. The assets could include intellectual or intangible property such as patents, trademarks and trade names, copyrights and trade secrets.
By the same token, your purchase may specifically exclude all liabilities incurred by the corporation, such as loans to banks, credit lines, etc. It is possible that some of those debts are secured (collateralized) by liens on the assets you want. You must either negotiate the assumption of those specific liabilities, or enter into some arrangement where the liens are removed.
Every business has legal relationships: with employees, suppliers of goods and services, perhaps a franchisor, a landlord, a licensor, etc. Some of these relationships are beneficial and wanted, some are not. Some contractual rights are expressly assignable (from the old company to yours, the new company), or the supplier will naturally be very happy to continue to work with the business. You must be selective in choosing the relationships you wish to continue, and divorcing yourself from the ones you do not wish to have.
Compliance with "bulk sales" legislation
It may occur to you that buying only the assets of an existing business and not assuming its liabilities may be a bad thing for the people to whom the old company owes money, or could owe money in the future. Now they will be expecting repayment from a debtor whose assets no longer take the form of the “business,” but rather may consist of nothing more than the cash you paid to the old company. They need some notice of what’s going on.
Every state in the United States has some version of a “bulk sales act” which provides for this. It is primarily a notice requirement. We make sure that the parties comply with it.
There is other similar legislation that protects creditors against the insolvent seller of a business disposing of assets at less than fair market value. This is something to be aware of if the impression is given to you that your buyer is insolvent (the business owes more than it has, or cannot pay its bills) and is giving you way too good a deal. This may indeed be a common problem among buyers new to the United States.
Stock purchase is still possible, but you must know what you're doing
There may be some very isolated situations in which you must consider buying the stock of the company in order to get some extremely attractive right or benefit that cannot be obtained in any other way. Let us say the selling company has the right to operate a marina. Without this license, there is no business. For some reason, the current license contract does not terminate in the event of a transfer of a controlling stock interest in the licensee. After appropriate disclosures and research, you have identified a large loan that is collateralized by liens on the seller’s property. You can either take over these liens, or the seller of the stock agrees to have them released. The seller is also willing to set aside all or a portion of the purchase price for a period of two years, to indemnify the company against claims, such as, for taxes brought by local, state or the federal government. The period of time in which these funds are set aside may correspond to the relevant laws that set a time period for bringing claims (in the U.S., called the “statutes of limitations.”)
Under these circumstances, you may wish to purchase the stock, after conducting appropriate due dilgence, and with reasonable protections.
The SIGNET Law Firm
We are dedicated to helping foreign business invest and operate in the United States successfully. As part of our services, we specialize in helping our clients procure the E-1 and E-2 visas, which enable them to live in the U.S. while they manage and operate their businesses.
Thank you.
We hope you have found this information useful. If you would like to speak with us, we are available.