When owners of a limited liability company (LLC) want to sell the whole business, a Membership Interest Purchase Agreement (MIPA) is the tool of choice to complete the transaction. A MIPA sells the membership interest of the LLC.
This is different from an Asset Purchase Agreement (APA) where only specific assets and not liabilities of the company are sold. When the membership interest of an LLC is purchased, both assets and liabilities are transferred from seller to buyer.
What is a membership interest purchase agreement?
A membership interest purchase agreement, sometimes called a MIPA, is a contract between a seller and a buyer to transfer the ownership of an LLC. A MIPA transfers the whole company with all of its assets and liabilities being transferred by the contract.
What contractual terms are in a MIPA?
All of the following contractual sections are typically included in a Membership interest purchase agreement:
- The Parties
- Purchase Price
- Representations & Warranties for Seller
- Representations & Warranties for Buyer
A MIPA can be very strictly negotiated by the buyer and seller’s attorneys with various versions ironed out in redlines. These are the types of hourly services that often cannot be quantized beyond the initial draft of the MIPA.
How much does a lawyer charge for a MIPA
It depends on the complexity of the transaction and the sales price. A basic MIPA may only be a few thousand dollars, but a complex closing process of the sale of an LLC with millions of revenue and employees and real estate and other assets and liabilities requires far more due diligence and time.
Sale of a business can be tens of thousands of dollars and can even include success fees to M&A consultants that help business sell to new buyers.
Why would a company use a Membership Interest Purchase Agreement (MIPA) instead of an Asset Purchase Agreement (APA)?
Often, the reason for buying the whole operating business by buying its membership interest is tax or regulatory aspects of the transaction.
A MIPA can be used to also transfer the liabilities, or other legal rights and privileges tied to a specific LLC, for example licenses to operate a restricted business like a casino or cannabis operation.
A company that does not face such restrictions from regulators may be more interested in selling the assets of the business to a new buyer, which would leave the original LLC with the obligations and liabilities so they do not burden the new owner.
Selling the membership interest is also a sale of what could be a long held capital asset, which changes the tax treatment than sales of the underlying asset.
The sale of the membership interest results in a capital gain, which is only taxed at a much lower rate than ordinary income. Selling the asset by itself is not the same and could be taxed as ordinary income or with special recapture rates if the equipment assets had been depreciated.
Should you use a MIPA template or hire a professional?
Using a template for a MIPA if you are not a lawyer is not the best idea. First, lawyers have malpractice insurance so you could be covered under a policy in case anything goes wrong on the deal. Next, corporate lawyers are trained in due diligence of transactions.
They can help you with each step and see things that you cannot in the transaction that may need to be addressed prior to closing.
Finally, a template you get for free on the internet is probably worth what you paid for it. Isn’t your business worth having a professional help you so that you can focus on finding the right buyer or your next venture?
We have a great version of a MIPA ready for our clients of Collateral Base.