A Stock Purchase Agreement Vs. An Asset Purchase Agreement

By - April 16, 2024 - Uncategorized

In the sale of a business, there are different types of purchase agreements that the seller and buyer may enter into. These include a stock purchase agreement (the sale or purchase of company stock) or an asset purchase agreement (the sale or purchase of company assets). Both options involve unique advantages and considerations, making it crucial for business owners and buyers alike to understand the nuances of each agreement type. In this blog post, we’ll discuss the differences between stock purchase agreements and asset purchase agreements so you can decide which option is best for you as a seller or buyer.

What’s the Difference Between Asset and Stock Purchase Agreements?

Whether you’re buying a business or selling a business, it’s helpful to know the differences between stock purchase agreements and asset purchase agreements. In stock purchase agreements, the buyer acquires all shares of a company’s stock, and the buyer becomes the owner of the entire business entity. This includes every asset as well as all liabilities, contracts, and other legal obligations.

In asset purchase agreements, the buyer acquires specific assets and liabilities of a business, allowing them to be selective in their approach. Assets can be tangible, such as commercial real estate or machinery, or intangible, such as licenses and intellectual property.

Factors to Consider: Price, Complexity, and Taxes

When considering entering into a purchase agreement, it’s important to consider a variety of factors and how they will impact your buying or selling experience. Some of these factors include price, complexity, and taxes.

• Price: Stock purchase agreements typically involve negotiations based on the valuation of the entire business, including goodwill and intangible assets. In asset purchase agreements, the price may be based on the individual assets that the buyer chooses to purchase, or the purchase price can also be based on the valuation of the entire business.
• Complexity: Asset purchase agreements may involve more complexity, as compared to stock purchase agreements, when individual assets have to be reassigned to the buyer.
• Taxes: Different purchase agreements have different tax implications. In stock purchase agreements, the seller may have to pay capital gains taxes. In asset purchase agreements, the buyer may benefit from potential tax advantages if the agreement offers a stepped-up basis, which leads to greater depreciation of the assets. Often times, allocation of purchase price can be critical for both types of agreements.

Whether you’re selling a business or buying one, considering the various factors of each purchase agreement type can help you decide which you’d prefer to enter into.

Importance of Due Diligence for the Business Buyer

If you’re the buyer in a purchase agreement – whether stock or asset – it’s crucial to perform due diligence prior to purchasing any stock or asset. This will help you make informed decisions and be strategic in your negotiations. When it comes to stock purchase agreements, due diligence includes looking at company financial records, contracts, regulatory compliance, employee matters, pending litigation, and any other assets, potential liabilities, or legal obligations.

When participating in asset purchase agreements, due diligence is still important, and the buyer should look at individual assets and liabilities of the company, as well as contracts, licenses, and any potential issues. No matter which type of purchase agreement you’re entering into, due diligence can help you identify potential red flags, effectively negotiate terms, and protect your interests.

Advantages of a Stock Purchase Agreement

Stock purchase agreements offer a number of benefits for buyers as well as sellers. This type of agreement can be relatively simple, especially compared to certain types of asset purchase agreements. The streamlined transfer of stock makes the acquisition process easier, as the buyer is purchasing all assets and liabilities of the company. This is especially beneficial to the seller, who won’t be left with unsold asset(s) or liabilities that they’re responsible for getting rid of. It’s also not necessary for each asset to be retitled. Employment contracts typically stay intact as well, minimizing disruption to the existing workforce. Stock purchases may also require fewer third-party consents than asset purchases, making the closing process more efficient.

For sellers, stock sale agreements allow them to potentially avoid future liabilities, since everything is being sold to the buyer. Sellers also don’t have to rewrite contracts, since existing contracts can be transferred to the buyer, most of the time. Additionally, the proceeds from a stock sale are taxed at a lower capital gains rate.

Disadvantages of a Stock Purchase Agreement

Although stock purchase agreements have plenty of advantages, there are also disadvantages to consider, especially for buyers. Since they’re purchasing all of the company stock, this type of agreement offers limited selectivity for buyers. They may have to take on the assets and liabilities that they don’t want in addition to the assets they do want. These existing and possible liabilities – including those that may be undisclosed – can lead to financial burdens and legal trouble in the future. When buying stock, buyers also run the risk of having to deal with minority shareholders who refuse to sell their shares.

Advantages of an Asset Purchase Agreement

Asset purchase agreements can be appealing, especially for buyers. Thanks to the ability to purchase specific assets and liabilities, buyers can pick and choose the assets and liabilities they want and leave behind those they don’t. This gives buyers greater flexibility than when buying company stock, which requires them to buy every asset and all liabilities. While this helps buyers mitigate risk, the sellers retain unsold liabilities and any asset that doesn’t sell.

This type of agreement also allows for a stepped-up basis, which can result in increased depreciation and provide buyers with potential tax advantages, making the agreement more financially appealing for buyers, depending on the allocation of purchase price. When buyers purchase a company with assets that have undergone significant depreciation, they can adjust or “step up” the tax basis of those assets to their current fair market value. This adjustment allows buyers to take advantage of higher depreciation or amortization deductions for tax purposes.

Disadvantages of an Asset Purchase Agreement

Even with their various benefits, asset sale or purchase agreements come with disadvantages, too. Asset purchases are often more complex than stock purchases since they may involve the sale of specific assets and liabilities. The transfer of individual contracts, permits, and licenses can make the transaction more time consuming and require thorough due diligence. It can also involve more documents. Contracts may also have to be renegotiated (depending on key provisions such as assignment clauses), and each asset sold must be reassigned to the buyer. Employment contracts and benefits might need to be renegotiated as well, and buyers may face challenges when transitioning existing employees. Since contracts may need to be renegotiated, there is also no guarantee that every vendor or customer of the seller’s company will agree to transfer over to the buyer’s company.

An asset sale agreement can also put sellers at a disadvantage. For example, the seller must decide what to do with the assets and liabilities that don’t sell. Sellers may also face higher taxes with certain asset classes. Additionally, the sale of assets may require consent from third parties, such as lenders, vendors, and customers. This can make the closing process of an asset sale longer and more complex.

Get Legal Assistance with a Business Stock or Asset Sale or Purchase

Whether you’re selling your business stock or assets, or looking to purchase company stock or assets, it’s important to have a business attorney on your side. Working with an experienced lawyer when entering asset or stock purchase agreements is crucial to ensuring you get proper legal guidance and mitigate potential risks.

Business attorneys understand the intricacies of these complex transactions, helping you navigate the process and ensuring your interests are protected, whether you’re the buyer or the seller. Attorneys can also help you conduct due diligence to help ensure you’re aware of each asset and any potential risks. They can also review and negotiate the terms of the agreement, as well as explain any contractual obligations or compliance regulations.

Additionally, attorneys can act as mediators, communicating between stock or asset buyers and sellers until terms are agreed upon, and reducing the risk of post-transaction disputes. Since business attorneys are experienced in purchase agreements, they can also provide strategic guidance to help you make informed decisions regarding the sale or purchase of an asset or stock. Working with an attorney is a great way to help make the sale and purchase of a business go smoothly.

Contact Stevens Law

When you need a knowledgeable and experienced business attorney to assist with purchase agreements, contact Stevens Law Firm. We specialize in business and technology law, working in practice areas like mergers and acquisitions, intellectual property, corporate and general business law, and more. We have years of experience helping businesses of all sizes and can assist you in the sale or purchase of business assets or stock. Purchase agreements can be complex, and we’re here to make the process simpler. Contact us today at (614) 826-3100 or via our online contact form to learn more about our services and request a consultation. We look forward to helping you reach your business goals.