How does an asset purchase agreement (APA) differ from a stock purchase agreement (SPA)

Congratulations, you have a successful business and it’s time to expand. You’ve had your eye on a company that would nicely complement your existing assets and capabilities and really give you a better chance to execute your medium to long-term strategy. 

You know you want to buy it but you’re not sure how you should approach the structure of the transaction - do you go for an asset purchase agreement or a stock/share purchase agreement? 

What is the difference and why does it matter? Let’s start with the basics.

What’s the difference?

Whether you’re on the sell-side or the buy-side, a sale and purchase agreement can be structure as a sale of assets or a sale of common stock. 

The basic difference lies in who owns the legal entity once the transaction closes - is the seller buying the whole company, or just the parts they need?

Asset Purchase: With an asset sale, the buyer will remain the legal owner of the legal entity itself, while the buyer will be purchasing a collection of specified individual assets - both tangible and intangible - that can make up the company, such as the equipment, real estate, licenses and intellectual property rights, customer and client lists, inventory and goodwill. 

By leaving the legal entity in the hands of the seller, the buyer does not take on the cash that they may have on their books, but also stays clear of the debt liabilities it has, which is why asset sale purchase agreements are often described as being cash-free and debt-free. 

What is included in asset purchases is the normalized net working capital, which includes accounts payable, accounts receivable and inventory. 

Any assets not negotiated as part of the deal will remain with the seller.

Stock/share purchase: These are much simpler agreements with fewer layers of complexity, as the buyer is taking on the legal entity itself and everything it owns. 

Unlike an asset purchase agreement where the buyer can separate out the assets they do not want to take on, the buyer here will be taking on the business in its entirety (depending on the size of the stake), including any debt or liabilities it has. 

What do I need to consider? 

When deciding which structure you want to execute, you need to take several factors into account because they both have their pros and cons depending on what you want to achieve. These include: 

• Control and complexity: The main defining difference between the two. Asset purchases give the flexibility to pick and choose exactly the assets and rights the buyer wants to take on. The downside, of course, is that it is a more complex procedure comprising multiple smaller transactions, each of which requires its own agreement and formalities. In an asset purchase, the buyer needs to make sure not only that they buy the parts they need, but that they don’t leave behind anything that gives those assets their value (e.g. if they buy an asset that derives much of its function from a piece of intellectual property that would be part of a separate asset transaction). 
• Shareholder involvement: One way in which an asset sale can actually be less complex than a stock sale is in the involvement of shareholders. Buying a legal entity requires the consent of a majority of its shareholders, depending on agreements. If any significant shareholders are unwilling to make the sale, or unavailable for whatever reason, that can scutter the deal. To buy assets, on the other hand, the legal entity itself - i.e. the company directors - can make that decision without necessarily needing approval of shareholders. 
• Due Diligence: This is an important process during any purchase, and becomes much more important and complex in stock purchase agreements as the buyer will also be taking on the company’s liabilities, therefore needs a much clearer picture of the shape the company is in. If they are just buying assets, they still need to make sure the assets function in the way they are meant to, but the process does not need to be as forensic and therefore does not need to be as expensive or time-consuming and allows for a shorter time to closing. 
• Tax considerations: On the sell-side, a stock deal may be more beneficial as proceeds are paid directly to shareholders, as opposed to asset sales which are taxed. On the buy-side, however, asset sales can be advantageous as the goodwill paid above the tangible value of the assets can be amortized over a long period of time, whereas goodwill from stock sales cannot be deducted until the stock is resold. 
• Renegotiation: With an asset sale, it is possible that the buyer will need to renegotiate contracts - both with suppliers and customers - if they are no longer part of the legal entity that initially entered into those contracts. Similarly, employment agreements with key employees may need to be renegotiated if they are not part of a stock sale. 

Before going in for an acquisition, have a clear idea of what you want it for and where in your business, weighing the advantages of each structure before pulling the trigger.

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