Business Lawyers Blog
In most mergers and acquisitions, buyers choose between acquiring the target company’s assets or purchasing its stock. Each approach carries different implications for liability exposure, contract rights, tax treatment, and post-closing integration. Business owners and executives evaluating an acquisition should understand these distinctions before negotiating transaction terms.
Structure Law Group, LLP Los Angeles M&A attorneys advise buyers, sellers, founders, and investors on mergers and acquisitions throughout Los Angeles and California. The following overview examines key differences between asset purchases and stock purchases, including considerations that may influence risk allocation between the parties.
What Are the Differences Between an Asset Sale and a Stock Sale?
Here is an overview:
Asset sale: The buyer purchases specific assets, such as inventory, real estate, IP, signage, trade secrets, or client lists. The seller keeps the legal entity, but, as the buyer, you now own the assets you have selected.
A major consideration is whether the buyer will take on the liabilities of the entity they are purchasing. Typically, a buyer can choose which liabilities to buy. As an example, some assets might be used as collateral to loans, so taking on the loan simplifies the purchase.
With an asset sale, the buyer also needs to have contracts assigned to them individually. Consequently, the buyer will need to assume employment contracts, vendor agreements, licenses, and similar contracts.
Stock sale: In a stock sale, the buyer acquires the company’s stock and becomes the owner of the business entity. The buyer automatically assumes all of the company’s assets, liabilities, and existing contracts and can later decide whether to integrate the acquired company with its current operations.
Which Option is Riskier?
Generally, a stock sale is riskier because the buyer assumes the seller’s liabilities. A buyer may voluntarily choose to take on liabilities in an asset purchase, but that decision is discretionary. Liabilities do not transfer automatically in most asset purchases.
For this reason, an asset sale requires intensive due diligence. A buyer must fully understand the target company’s current liabilities:
- Current contracts and licenses
- Current employment contracts and independent contractor agreements
- Customer complaints (which could ripen into litigation)
- Current lawsuits filed against the company
- Torts the company has committed, whether or not a lawsuit has yet been filed
Thorough due diligence is paramount to understanding the potential risks of adverse litigation. A substantial class-action lawsuit alleging product defects could result in significant financial losses for a company.
One countervailing consideration is whether the company has insurance which could cover any outstanding lawsuits, such as torts. Review whether you can assume the insurance contract when buying a company.
Are There Benefits to a Stock Sale?
Yes. Specifically, a stock purchase is usually simpler and requires less time and money. Instead of individually assigning contracts, you simply take over the company and are bound by its current obligations.
A stock purchase also allows you to keep the target company as an existing entity. That might be critical if there is significant goodwill associated with the brand, which you could lose in a simple asset purchase.
Call Structure Law Group for Help
The choice between an asset purchase and a stock purchase can affect liability exposure, contractual obligations, tax treatment, and post-closing operations. Buyers and sellers should evaluate these issues carefully with an attorney before selecting a transaction structure. Structure Law Group, LLP advises businesses, founders, investors, and management teams on mergers and acquisitions throughout Los Angeles and California. To discuss the legal considerations involved in an acquisition, contact Structure Law Group, LLP to schedule a consultation with a Los Angeles mergers and acquisitions attorney.