Buying an existing business can be a great way to get started in an industry – but you need to be conscious of how the purchase is structured.
Two common approaches involve buying the company’s assets and purchasing its shares. Either way, you can end up in control of a company, but the two methods have different financial and legal consequences.
What’s the difference between an asset purchase and share purchase?
The simple answer is that one involves buying a company’s most significant assets rather than the company itself and the other involves buying the actual company, including both its assets and its liabilities.
Some of the most important differences include:
- An asset purchase lets you decide what assets (and liabilities) to buy, while buying shares means that you generally assume broad responsibility for both.
- An asset purchase could mean the renegotiation or reassignment of contracts, leases and licenses. A share purchase usually leaves all of those in place.
- It may be possible to change the organizational structure and taxation basis in an asset purchase, while share purchases leave those untouched.
Buyers usually prefer asset purchases, especially when intellectual property is involved, because that method offers more control. Sellers usually want share purchases, particularly when they are seeking to retire or leave for other reasons, because it allows them to wrap things up cleanly.
Neither method is without risk. An attorney experienced with acquisitions can help you to examine potential liabilities, discuss indemnification provisions and other aspects of purchase-sale agreements to most effectively protect your interests.