STRUCTURING THE SALE OF A BUSINESS
Asset Purchase v. Stock Purchase Transaction
Many of our clients come to us for assistance in buying or selling an existing business. One of the first concepts we review with our clients is whether to structure the deal as a stock purchase or an asset purchase transaction. If you’re contemplating the purchase or sale of a business, it’s important to understand the difference between the two.
Asset Purchase Transaction
In an asset purchase transaction the buyer typically purchases all or most of the assets of an existing business entity. Those assets may include equipment, inventory, trade names, vehicles, websites, intellectual property, client lists, accounts receivable, contract rights and good will, and other property.
The parties agree which assets will be transferred from the seller to the buyer. Any assets which are not transferred remain the property of the seller. The ownership in the seller business entity does not change. For example, if John Jones is the sole stockholder of the seller business entity before the transaction, John retains his stock in the company, but the company sells the assets used to operate the business. In this type of transaction, the buyer typically forms a new business entity (a corporation or limited liability company, etc.) to own the assets acquired, or the buyer may use an existing business entity. The seller business entity may continue in existence following the transaction, but most of the assets have been transferred out of the company.
An important feature of the asset purchase transaction is that the buyer doesn’t take on any of the debts, liabilities, contracts, or obligations of the seller business entity unless specifically agreed to by the parties. The seller business entity remains liable for paying its outstanding debts and liabilities, and is still obligated for any contracts it entered prior to the transaction. Consequently, an asset purchase transaction is typically less risky and therefore more attractive to a buyer from a legal perspective.
Stock Purchase Transaction
By contrast, in a stock purchase transaction, the buyer purchases the stock of a company directly from the individual shareholder(s). (Or, in the case of a limited liability company, the buyer purchases the membership interests of the current owner(s) of the business.) For example, if John Jones is the sole stockholder of the business, John sells all of his stock to the buyer. The legal and corporate status of the company does not change with the transaction except that the stock of the company is transferred to the buyer. Further, all of the assets, contracts, debts, and liabilities, remain with the business. And, unless the parties otherwise agree, the seller can generally walk away from the business without concern for future liabilities. Consequently, a stock purchase transaction is typically more risky for a buyer, and therefore less attractive to a buyer from a legal perspective.
These are just a few of the concepts to be considered in selecting the appropriate structure for the purchase and sale of a business. Each deal is unique, and there are numerous other factors to be evaluated, including, for example, the complexity of transferring title to assets, tax considerations, employee matters, and the like. We encourage our clients to undertake a thorough analysis of these issues before agreeing to any particular structure.
The information you obtain at this site should not be taken as formal legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls, letters and electronic mail. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.