Stock Purchase Agreements vs. Asset Purchase Agreements: Comparing Business Sale Structures

Before choosing the more relevant option to your business, it is crucial to evaluate the considerations, advantages and benefits of each structure with Lumina Legal’s support. In this way, it is possible to know which would be the right one according to your interests and needs, terms and conditions at the moment of making a transaction with a business, acquiring or selling it.

Now, let’s review in detail Stock Purchase Agreements vs Asset Purchase Agreements.

Understanding Stock Purchase Agreements (SPA)

This type of contract expresses the seller’s consent to transfer to a buyer the stock of a company, including its assets, liabilities and obligations. With this agreement, a smooth transition is carried out, while the business operations continue with only a few changes. 

Some of the sections included in a stock purchase agreement (SPA) are, for example 1) recitals, where it is expressed and described the most relevant information about the transaction, 2) the definitions of words involved in the interpretation of the contract, 3) the indemnification and termination rules, and last, but not least, 4) the warranties, representations and obligations of the parties, among other information depending on the characteristics of the transaction.

Advantages of Stock Purchase Agreements

1. Tax Benefits: Sellers receive favorable tax treatment due to the fact that the proceeds from share sales are not considered ordinary income.
2. Simplicity: The new buyers step into the shoes of the sellers. 
3. Comprehensive Transfer: The transfer of licenses, contracts, and permits does not usually require a consent or assignment agreement.

Disadvantages of Stock Purchase Agreements

1. Regulatory Approvals: It might be necessary to meet specific legal criteria in order to acquire an entity.
2. Potential Liabilities: Incomplete or misleading information, breach of representations and warranties, non-compliance with legal requirements, post-closing disputes or unforeseen market changes.

Stock Purchase Agreements: Buyer’s and Seller’s Point of View

For the buyer, there are more risks to buying the company’s stock, and taxes could be affected as a consequence of a lower depreciation expense. In addition, warranties are essential to mitigate potential liabilities.

It is advisable to resort to this agreement if the target company is dependent on a few large suppliers or customers, if contracts cannot be assigned to a new owner, or if it has a significant number of patents.

The seller sometimes has less responsibility for future liabilities, but it depends on the purchase agreement. 

Understanding Asset Purchase Agreements (APA)

Asset purchase agreements are contracts by means of which a seller transfers specific or even all assets of a company to the buyer, who has the decision power to choose which assets it wants to acquire and which liabilities it will assume. Consequently, the asset purchase agreement provides flexibility to define the terms and conditions of the transaction, which would result in tax benefits.

Some of the most important elements you are going to find are similar to those stated in the previous case, including information related to the negotiated assets and its price, the payment method, and the terms of delivery. In this way, both parties are responsible for being diligent in evaluating the profile and background of the other, to make a successful and informed decision.

Advantages of Asset Purchase Agreements

1. Flexibility: To the seller at the moment of defining which assets it would like to offer for sale and which to keep.
2. Liability Retention: For sellers who want to control the liability extent, asset sales offer the advantage to preserve those liabilities.
3. Negotiable Pricing: It is possible to negotiate the price of individual assets which could have a higher valuation, which could result in tax considerations such as depreciation and amortization.

Disadvantages of Asset Purchase Agreements

1. Tax Implications: This type of agreement is not considered as a tax-free reorganization. For this reason, the business’s tax status, the negotiated assets and the distribution of the purchase price will determine the tax implications.
2. Customer Retention: The customer database is not immediately retained. In this way, the buyer has to make strategic decisions to retain the clients of the target company.

Key Differences between Stock Purchase Agreements and Asset Purchase Agreements

Taking into account the above context, it would be possible to identify some differences between both agreements. Mainly, the factors include the assets that are involved and the legal implications. Thus, buyers are frequently interested in asset sales, while sellers prefer to use stock sales. 

Broadly speaking, in a stock purchase agreement, the shares of the owner of a company are for sale, whereas in an asset purchase agreement, individual or specific assets and liabilities are transferred. On the other hand, it is necessary to consider that a stock sale can only be used by incorporated companies, while asset sales do not depend on the structure of the business. It could be a partnership, a proprietorship or a liability company.

A stock sale is often smoother than an asset sale, which involves more logistics and paperwork. Regarding the taxes and risks, asset purchase agreements can represent some troubles for the seller in fiscal matters. Therefore, this financial burden could impact a higher selling price.

In a share sale, the buyer faces a higher risk by assuming known and contingent liabilities. As a result, a lower acquisition value may be requested.

Making An Informed Decision For Your Business Acquisition

At the moment of acquiring an entity, legal advice will be essential to identify if a stock purchase agreement or an asset purchase agreement would be better for your business. That is where legal advice can help protect your investment.

Your interests are the most important, so let us know about your company, your priorities and goals, and which liabilities or assets you are willing to purchase. Lumina Legal will be pleased to advise you.