Clients frequently get confused about the difference between a stock and an asset purchase agreement. It is important to consult with an experienced corporate attorney who can explain the difference between the two and who can advise the best fit for your company’s needs. Let’s look at the distinctions.
There is a significant difference between an asset purchase and a stock purchase, and each comes with unique benefits and drawbacks.
In a stock purchase, the buyer purchases stock in a company that may have unknown or uncertain liabilities. Unless the company is publicly traded, it can be more difficult for a buyer to value the stock of a company it intends to purchase. The seller in a stock purchase can walk away without liability after they complete the transaction. In most cases, the vendor relationships, customer base, employees and property remain the same — all that changes is the owner of the shares of stock. A stock purchase, however, may or may not involve assuming the company’s current debts and liabilities.
In an asset purchase, the buyer will only buy certain assets of the seller’s company. The seller will continue to own the assets (as well as its existing business) that were not included in the purchase agreement with the buyer. The transfer of ownership of certain assets may need to be confirmed with filings, such as titles to transfer real estate. In most cases, an asset purchase protects the buyer because the buyer will only assume liability for the assets included in the purchase agreement. The seller will still be liable for assets not sold.
Due diligence is important whether you are considering either type of agreement. Important steps include:
• Gathering the required legal and financial documentation;
• Review of all agreements prior to the sale and/or purchase;
• Ensuring that if the company is buying assets, it receives what it desires and expects;
• Confirm that any assets are free from debts, liens and liabilities.