When considering acquiring another nonprofit, there are two types of acquisitions that are typically considered – an asset purchase and a merger transaction. Several factors, including due diligence, payment of consideration, the assumption of liability, assignment of contracts (including endowment agreements), the existence of planned gifts, future operating goals and applicable state and federal laws, should be considered in determining the structure of the potential transaction.
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In this post, we explain the basic differences between the two and break down the pros and cons of each to help you determine what is the best scenario for you.
The Difference Between an Asset Purchase and a Merger
The difference of an asset purchase and a merger is that in an asset purchase, you only acquire selected assets from the seller and the liabilities that go with the said asset purchase, leaving behind the liabilities outside of the sale. The seller still exists and will potentially continue to operate, while in a merger, a new business entity is formed, the legal existence of the seller is terminated.
What is an Asset Purchase?
In an asset purchase, you only purchase selected assets from the seller and, you don’t have to assume all of the seller’s liabilities. These liabilities remain with the seller post-closing if not explicitly assumed. The seller will continue to exist, and potentially continue to operate, following the sale.
Advantages of an Asset Purchase
You get to pick and choose only the assets you actually want to acquire (no unneeded or unwanted assets). All other liabilities, both known and unknown, remain with the seller. An asset purchase reduces or eliminates the risk of assuming unknown liabilities.
Disadvantages of an Asset Purchase
Failure to identify and purchase all of the assets needed for operation is a risk. Third-party consent may also be required before the assets can be transferred to you. And because you’re purchasing distinct assets, the title for each must be transferred individually.
The manner in which the title of an asset is transferred will vary depending on the type of asset. Valuation of assets to be transferred may be expensive and time-consuming but may not be an issue where both entities are 501(c)(3) organizations as such organizations are permitted to grant assets to one another.
What is a Merger?
A merger means that two entities are literally combined into a single entity. The simplest form of a merger is a forward merger, whereby the seller merges into your operation and your organization survives the merger. As such, by law, the legal existence of the seller terminates as of the effective date of the merger.
Advantages of a Merger
The advantage of a merger is that all of the seller’s assets become yours, a merger does not require cash, and anti-assignment provisions are generally not triggered. Any planned gifts set-forth in wills or trusts will inure to the surviving entity by operation of law.
Disadvantages of a Merger
The disadvantage of a merger is that all of the seller’s liabilities become your liabilities, hence representations and warranties in the merger agreement need to be heavily negotiated so that you understand the liabilities you will assume.
As we’ve detailed, there are benefits and downsides to both mergers and asset purchases. It all boils down to your individual needs and goals. If you’re still uncertain, reach out to the team at Caritas Law Group today to discuss which route makes the most sense for your organization.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations nationwide. Ellis also advises donors with regard to major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.