A business purchase agreement is a contract that transfers a company from the owner to the new buyer. A purchase agreement is used to buy and sell all types of businesses, including sole proprietorships, partnerships, corporations, and limited liability companies. Regardless of the type of business entity, these deals can be set up as either stock or equity purchase or asset purchase agreements. Whether you’re selling or buying, understanding the difference between the two is important as you embark on this seismic task for your business.
What’s a Sale of Assets Purchase Agreement?
An Asset Purchase Agreement lets a buyer purchase only specific assets from the seller, rather than the entire business. This form of purchase agreement outlines the conditions associated with the transfer of part of the company’s assets, lists the purchase price, specifies the liabilities the buyer will assume, and includes warranties. These contracts are common in mergers and acquisitions — and they can help both the buyer and seller in several ways, including reducing the risk of liability and offering tax benefits.
Asset purchase agreements may be used to buy:
- Equipment
- Machinery
- Inventory
- Intellectual property
- Customer contracts
- Real estate
These agreements specify what assets and, more importantly, which liabilities the buyer is purchasing from the seller.
Buying assets without assuming the full obligations and risks that come with buying the seller’s business entity can be advantageous to prospective buyers. An Asset purchase can allow people who are looking to expand their operations without incurring the legal and financial liabilities attached to the business itself.
What is a Sale of Shares Purchase Agreement?
A sale of shares purchase agreement (also referred to as a stock purchase agreement) is distinct from an assets purchase agreement, because a Stock Purchase Agreement involves buying the seller’s stock or shares in the company, rather than individual assets. These contracts are used to transfer ownership of an entire company — including all its assets, liabilities, and contracts. A Stock Purchase Agreement sets the prices of the stock being sold, the conditions of the sale, and establishes the obligations of each party involved in the transaction. A stock purchase agreement includes representations and warranties from the seller that cover critical aspects of the company, including its financial health, legal and regulatory compliance matters, and disclosure of liabilities.
Some benefits of a well-drafted sale of shares purchase agreement can include business continuity, favorable tax treatment, and complete transfer of ownership. These transactions can also be more simplified than asset purchase agreements, since there is typically no need to assign individual assets or contractual agreements between third parties. Still, since the buyer assumes the entity’s existing liabilities, it’s important to conduct due diligence before finalizing the sale.
Is it Better to Use an Asset Purchase Agreement or a Purchase of Shares Agreement?
The objectives of the prospective buyer and the seller determines whether it’s better to use an asset purchase agreement or a stock purchase agreement . Since an asset purchase agreement lets a buyer purchase individual assets, avoids unwanted liabilities and limit their exposure to risk. With a purchase of shares agreement, the buyer acquires the entire company — including any unknown risks and undisclosed debts.
Entering into an asset purchase agreement may be the better option for risk averse buyers who seek flexibility. Asset Purchase Agreements can be longer and more complex transactions. Sale of shares purchase agreements are simpler, as they transfer a business entity and complete control over the entity in a single transaction. Stock Purchase Agreements can often involve substantial risk, the Stock Purchase Agreement is typically more appropriate for buyers who will conduct extensive due diligence and are confident in their findings.
Contact an Experienced New York Business Attorney
Selling or purchasing a business or its assets can be complex. It’s best to have a knowledgeable business attorney by your side who can guide you through the process and advise you every step of the way. Offering skillful counsel and high-quality legal services, Brinen & Associates advises clients regarding a wide variety of business matters, including those involving drafting, negotiating, and litigating business purchase agreements. Call (212) 330-8151 or send us a message to learn more about how we can assist you.
