Asset Purchase Agreement v. Stock Purchase Agreement: Pros and Cons

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An Asset Purchase Agreement (APA) is a legal document that finalizes all the terms related to the purchase and sale of a company’s assets. So, what is an asset? An asset is an item that is owned by a Company that has some value. These items can be tangible, such as machinery or vehicles, or intangible, such as vendor lists, data, or bank accounts. An APA is a flexible legal mechanism as it allows the Buyer to choose which assets and which liabilities it would like to assume. For example, a Buyer can choose to purchase the rights to use trademarks, the website, or social media profiles and specifically exclude certain contracts or liabilities from becoming a part of the deal.

A Stock Purchase Agreement (SPA) is a legal document whereby stocks of a Corporation are transferred from the Corporation to a purchaser for value. When the deal is finalized, the seller will transfer the stock certificates to the buyer and the buyer pays the price according to the agreement as consideration for the stocks. A Stock Purchase Agreement can be a little riskier than an Asset Purchase Agreement as you may not be one hundred percent certain of what you are purchasing. This agreement lays out in detail the terms of the deal including representations and warranties, number, and price of shares, when the stocks will be transferred and so much more.

Pros of an Asset Purchase Agreement

  • The Buyer in an Asset Purchase Agreement can pick and choose which assets he would like to obtain and not assume certain or uncertain liabilities like he would in other acquisitions. This results in a less risky transaction for the Buyer.
  • The ownership of a business entity itself is not transferred.
  • When you buy assets instead of stock, the Buyer can avoid problems that may be presented with minority shareholders.

Cons of an Asset Purchase Agreement

  • The title of some assets may have to be retitled in the Buyer’s name.
  • Renewal of employee contracts and contracts with Customers.
  • Certain licenses or permits may not easily transfer to the Buyer.

Pros of a Stock Purchase Agreement:

  • Stock Purchase Agreements tend to be a little simpler than Asset Purchase Agreements. Instead of a Buyer walking away with all the desired assets and leaving behind the liabilities, the buyer assumes the entire entity.
  • Contracts, licenses, and permits easily transfer to the Buyer because they remain with the acquired entity. 

Cons of a Stock Purchase Agreement

  • Minority shareholders may not want to sell shares which can halt the process.
  • The Buyer will inherit known liabilities. In addition, the buyer may also inherit unknown or undisclosed liabilities (i.e. potential lawsuits, tax liabilities, etc.).
  • It is impossible for the Buyer to fully know the company’s past conduct and actions. Lawsuits and/or liabilities for past actions may become a part of the transaction and a Buyer must account for such.

The purchase and sale of a business is a complex transaction that should not be taken lightly.  Whether you are the seller or the buyer of the business, it is crucial that you obtain solid legal counsel from an experienced business attorney.  The attorneys at McCormick Law & Consulting have handled over $1 Billion dollars in combined transactions involving a variety of business types.  There are dozens of issues and legal questions that must be properly answered during any type of business transaction.  We work closely with our clients to navigate the process and create a roadmap for success. 

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McCormick Law, PC d/b/a McCormick Law & Consulting is a boutique business and real estate law firm located in Norfolk, Virginia & Raleigh, North Carolina, that seamlessly serves clients throughout Virginia and North Carolina. Whether you are a new or existing client of the firm, McCormick Law, PC, cannot represent you on any new matter until the firm has made a determination that there is no conflict of interest and that it is willing to accept the new engagement. The testimonials on this website reflect the real-life experiences and opinions of our clients. However, the experiences are personal to those particular clients, and may not necessarily be representative of all clients. We do not claim, and you should not assume, that all clients will have the same experience. Your outcome may vary.

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