There are generally two ways to purchase an existing business, an asset purchase and a stock purchase (or share purchase). This post explains the difference between the two, and why an asset purchase may sometimes best for the purchaser of the business.
With a stock purchase, you buy the business itself. This involves acquiring all of the shares of stock. The business goes on almost exactly as before, with the new stockholders electing new board members and choosing new management. As with many small- or medium-sized business, the new management may be the new stockholders.
In an asset purchase, however, a new legal entity owned by the purchasers buys the assets of the business. The purchasers can pick and choose exactly which assets they want, and which they don’t want. This includes both tangible and intangible items – machinery, contracts, good will, real estate, accounts payable or receivable, and so on.
If there are certain items that the purchaser does not want, those can be left out of the asset purchase. For example, there may be certain accounts the purchaser is not interested in, or there may be unwanted real estate or dilapidated machinery that is not desirable. The purchaser can cherry pick everything it wants, and leave out what it doesn’t want.
An asset purchase is usually completed via three steps: (1) Letter of Intent; (2) Due Diligence; and (3) signing of an Asset Purchase Agreement.
A Letter of Intent is a short preliminary agreement stating what the intended purchase price is for the assets. It often contains a confidentiality agreement. It also usually contains an agreement by the seller not to solicit other offers. The final price, however, is usually contingent on what is learned during Due Diligence.
Due Diligence commences once the Letter of Intent is signed. Due Diligence is when the purchaser’s attorney and accountant review in detail the company’s assets. The attorney reviews contracts, liens, and other legal documents, and arranges for transfer of leases and other agreements that the new business entity needs to assume. The accountant does a deep dive into the company’s books to ensure the price stated in the Letter of Intent is accurate.
Finally, the Asset Purchase Agreement is signed. There are usually credits and debits, which adjust the final price based on anything that was learned during Due Diligence. The Asset Purchase Agreement, unlike the Letter of Intent, is a long, binding agreement outlining all the parties’ rights and obligations.
The asset purchase is then complete. The new owners own all (or most of) the assets of the purchased company, and the old owners still have the legal entity that previously held all those assets. Normally, the old company is then closed down. The new owners move forward with selecting a board, managers, and other officers.
As you can see from the foregoing, an asset purchase agreement is a multi-step process. It is much more complex than a stock purchase, but has the benefit of the new owners being able to pick and choose what parts of the old business will be acquired.
DYE CULIK PC is a Charlotte, North Carolina business law and litigation firm that represents entrepreneurs, startups, and small- to medium-sized businesses with all aspects of the business lifecycle throughout North Carolina. If you have a question about your business needs, contact us at 980-999-3557 to see how we can help.
Comments