As a business owner, you may come across two types of purchase agreements when acquiring or selling a company – cross purchase agreement and entity purchase. Both options have their pros and cons, and it`s essential to understand each one before making a decision. In this article, we`ll discuss the difference between the two and their implications.
Cross Purchase Agreement
A cross purchase agreement is a contract that allows the shareholders of a business to buy and sell each other`s shares. In this scenario, each shareholder purchases a predetermined number of shares from other shareholders in the company. This type of agreement is commonly used in small businesses where there are a limited number of shareholders.
One significant advantage of a cross purchase agreement is that it provides the opportunity for shareholders to maintain control over the company by purchasing a majority of shares. It also simplifies the process of transferring shares as it involves only the shareholders, and not the company itself.
However, a cross purchase agreement can become challenging to implement when there is a large number of shareholders. It may also become complicated if there is a discrepancy in the price of shares held by different shareholders.
Entity Purchase
An entity purchase agreement is a contract that allows a company to purchase all outstanding shares from its shareholders. In this scenario, the company itself becomes the holder of all the shares, and the shareholders receive payment for their shares. This type of agreement is commonly used in large corporations with many shareholders.
One significant advantage of an entity purchase agreement is that it simplifies the process of transferring ownership as it involves only the company and not individual shareholders. It also provides the opportunity for the company to eliminate minority shareholders or consolidate ownership.
However, an entity purchase agreement may require a higher valuation, making it more expensive than a cross purchase agreement. It may also reduce the control of existing shareholders over the company.
Conclusion
In conclusion, when considering a cross purchase agreement vs an entity purchase agreement, it`s essential to consider the size and structure of your company, the number of shareholders, and the goals of the transaction. Both scenarios have their advantages and disadvantages, and it`s best to consult with legal and financial advisors before making a decision. A well-planned purchase agreement can provide a smooth transition for a business acquisition or sale.
