When it comes to buying and selling small businesses, asset purchase agreements are the most common type of agreement used. However, there are reasons why a seller might want a stock purchase agreement instead. In this article, we'll discuss the differences between the two and provide an overview of asset purchase agreements.
Disclaimer: Deal Camp is not a licensed attorney and cannot offer specific legal advice. The content of this article is for general informational purposes only. Please consult your attorney for advice regarding your specific situation.
What is an Asset Purchase Agreement?
An asset purchase agreement is a document that outlines the assets being purchased and any liabilities the buyer is willing to assume. This is useful because it allows the buyer to specify which liabilities they are willing to take on. For example, if the buyer is purchasing a car, you don't drag along with it the note payment, typically. The same thing applies with buying companies, the buyer can choose which assets and liabilities to acquire.
Most small business transactions are asset purchase agreements. The great thing about an asset purchase agreement is that it allows the buyer to avoid any skeletons buried in the closet of the seller.
What is a Stock Purchase Agreement?
A stock purchase agreement is when the buyer purchases the stock of the company instead of the assets. The reason a seller might want this is because of the tax consequences. When a company is sold via a stock purchase, the appreciation of the stock is what the seller pays taxes on.
However, if the company is sold via an asset purchase, the seller pays taxes on the difference between their basis and what they get for the assets. This is why some negotiation can help navigate the tax consequences.
What Goes into an Asset Purchase Agreement?
When it comes to an asset purchase agreement, there are a few things that need to be outlined. These typically include:
- The specific assets being purchased
- The total price paid for the assets
- The structure of payment including cash and seller financing (aka "At Risk Money")
The money at risk is typically structured as a seller's note, working capital adjustments, and/or other forms of seller financing such as an earn-out or an equity roll-over. Having an experienced M&A attorney on your team is critical for you to avoid mistakes throughout your deal.
All of these things are required to ensure the clean & stress-free deal closing.
Check out my video about Due Diligence for a more in-depth talk about what risks can transfer over to you that will potentially cost you money.
Unless you understand what goes into the Asset Purchase Agreement, you won't know what to expect at closing and how things can shift on you.
There are many different ways that you can lose your shirt and be taken advantage of, thus it is very important to consult with an experienced deal attorney to ensure that all of the terms are clearly outlined and that the buyer is protected.