When acquiring an existing company, buyers face a pivotal choice: whether to opt for an asset purchase, acquiring all or most of the seller's assets, or to acquire the company's equity or stock. An asset purchase presents distinct advantages for both parties, streamlining transactions and offering numerous benefits. Chief among these advantages are the following:
Limited Scope
In an asset purchase, sellers have the option to restrict the assets sold, allowing buyers to selectively acquire only those assets they wish to purchase. This inherently provides both parties with greater flexibility to exclude specific assets from the transaction.
Limited Liability
Unlike a stock or equity purchase, an asset purchase does not require a buyer to assume liabilities for anything other than the assets subject to the transaction. In a stock or equity purchase, a buyer must always be concerned with any unknown or uncertain liabilities of the seller’s company. Liability can arise from everything from intellectual property infringement to employment claims.
Limited Transaction Cost
In a stock purchase, some buyers may opt to waive due diligence to minimize transaction costs. However, this approach is highly risky because without thorough legal and financial due diligence, the buyer may unknowingly inherit substantial liabilities. In contrast, an asset purchase enables both buyer and seller to execute a straightforward asset purchase agreement (APA), clearly outlining all assets included and excluded from the transaction. An APA also allows sellers to provide straightforward representations and warranties to the buyer, avoiding the need for extensive financial and legal due diligence, which can be costly and time-consuming.
Conclusion
In conclusion, the choice between an asset purchase and a stock or equity purchase when acquiring an existing company is crucial and depends on various factors. Opting for an asset purchase offers significant advantages for both buyers and sellers. Scheduling a free consultation with Sentient Law can be instrumental in navigating the complexities of an asset purchase. Our experienced legal team specializes in structuring straightforward asset purchase agreements that clearly define the assets involved and exclude any unwanted liabilities.
About the Author
Matthew M Rossetti is the founder of Sentient Law, Ltd. and began his legal career as a law clerk at 19 years old. While earning his B.A. at DePaul University, Matt interned for the Attorney General of Illinois and worked as a clerk at a personal injury firm, where he assisted in the litigation of several complex, multi-million dollar medical malpractice, personal injury, products liability, and workers’ compensation claims.
