What is an Asset Purchase?
In an asset purchase of an existing business, the purchaser of the new business purchases the assets of the existing business. This type of purchase results in your Corp becoming the owner of the business operations. When someone is using a ROBS funded corporation, following the proper steps is important to ensure that you don’t trigger prohibited transactions. For a good checklist of a typical asset purchase, see this .pdf from Practical Law. For this post we will focus on a few key differences for a ROBS corporation. To keep it simple, the target is “Neighborhood Market”, a small, local store with good revenue and customer loyalty, a handful of long term employees and a retiring owner.
ROBS Corp as the Acquiror
Your Corp is not likely named “Neighborhood Market”. That’s their name. If you are interested in the name, because it has good loyalty, the the name is one of the assets you will be purchasing. The Corporation can be named anything you want, and will be doing business as “Neighborhood Market”. Which assets you purchase from the entire list they have for sale is up to you. Maybe you don’t want to sell everything they carry, or want to add some product lines, or a wine shop. The end result is up to you, not the seller. However, what is up to the seller is whether they want to sell to you. The key for a ROBS client is to understand that the Corporation is the purchaser, not the Plan and not you as an individual. The Plan is simply a shareholder of your corporation as the purchaser.
ROBS Corp as the Employer
Ever since the civil war, we don’t buy and sell people as assets. The retiring owner will likely not want to keep employing them. You are not required to hire them, unless you make this a condition of the purchase and sale agreement. My recommendation to clients is to not agree in advance (in the purchase agreement, for example) to hire anyone, unless you are willing to interview them ahead of time. Just because they worked out well for the previous owner and business model does not mean they will work well with you and your ideas. Often keeping the existing employees is exactly what you need to do. I just want you to know that this is not mandatory in an asset purchase.
Whether you retain the existing employees or hire new employees, in this example you have employees from the beginning of your business operations and these employees have rights under the 401K Plan, including, perhaps, access to corporate stock as an investment option.
ROBS Corp as the Operating Company
One of the hard requirements for ROBS qualification is the the Corporation that is the plan sponsor meets the definition of an operating company: is in business providing a product or service for profit. Owning the assets of the “Neighborhood Market” (and claiming the income and expenses on a corporate 1120 tax return) makes your corp an operating company. The corporation is the legal entity, “Neighborhood Market” is the business. Most people see these as the same thing. Your customers know “Neighborhood Market”. The IRS and your State Dept of Revenue, etc, know your corporation. Your sign all legal documents in the name of your corporation as a corporate officer. Your Plan is one of the corporation’s shareholders.
Not all of our clients know whether their purchase is an equity or asset sale. That’s ok, we can help you figure it out. Some people ask which one is better. From a ROBS point of view, if you have an option (and most of the time you won’t, that will be set by the seller), following the proper steps for the transaction type is far more important which type of purchase you structure. Either way, we can help. Just want to brainstorm the differences as it relates to your ROBS business purchase? Set up a no cost or obligation initial consult. Let’s chat.