Buying or selling a business is a major transaction that often involves many moving parts. After the initial conversations between a potential buyer and seller have taken place, most business acquisitions then memorialize these conversations in a document called a “Letter of Intent.” If the parties decide to move forward with the sale after the letter of intent has expired, then a purchase agreement will be prepared. There are different types of purchase agreements depending on the type of transaction; most notably, the asset purchase agreement and the stock purchase agreement.
What is an Asset Purchase Agreement?
An asset purchase agreement is a transactional document that transfers the ownership of business assets from the seller to the buyer. This type of purchase agreement is generally prepared when a business owner is selling the business to a new owner. The first question that must be answered before determining whether an asset purchase agreement or a stock purchase agreement is the appropriate document for your upcoming business transaction is: what exactly is being sold?
An “asset” is characterized as an item of value, either tangible or intangible, that is owned by the business. For example, if you intend to sell your company’s assets, for example, inventory, equipment, and vehicles, then an asset purchase agreement is likely the more appropriate type of agreement. The assets to be purchased may include all of the business’s assets or, may include only a limited list of business assets.
What is a Stock Purchase Agreement?
On the other hand, a stock purchase agreement pertains to the sale of a company’s stock and, while generally a simpler document to prepare, is far less common than the asset purchase agreement. This is partially because, in North Carolina, stock purchase agreements are generally only used when the transaction involves a corporation, since the corporation is the only type of entity that actually has stock. One of the most important differences between the asset purchase agreement and the stock purchase agreement is the buyer’s assumption of company liabilities as part of the transaction.
An asset purchase agreement is oftentimes more appealable to buyers who intend to assume at least some of the company’s liabilities, since the seller must disclose the company’s liabilities to the buyer. This is distinguishable from a stock purchase agreement where the seller has no obligation to disclose known liabilities and the buyer essentially purchases the company’s stock with the risk that they may uncover hidden liabilities down the road. Meaning, the buyer may not necessarily know what all they are purchasing.
Regardless, the underlying premise of both an asset purchase agreement and a stock purchase agreement are the same: ownership over some aspect of a business is being transferred to a new owner. There are many additional differing characteristics between these two types of agreements that must be considered in determining the most appropriate document to move forward with, which both parties should be advised of. Without receiving proper guidance throughout this process, one party may find themselves inadvertently agreeing to unwanted terms.
Dye Culik PC is a Charlotte, NC based business and franchise law firm. Our attorneys represent individuals in buying and selling businesses, business acquisitions, and asset purchase agreements. Connect with us for a consultation, we're here to help.