3 Ways to Structure the Deal

The transaction can take three general legal forms:

  1. Asset Purchase Agreement (APA): An APA transfers the individual assets from you to the buyer through a bill of sale, which is signed at closing. You retain ownership of your entity while the buyer forms a new entity or uses an existing entity they own to purchase the assets of your business.
  2. Stock Purchase Agreement (SPA): An SPA transfers the shares of your entity, such as your corporation or LLC, that owns the assets of your business. By purchasing the shares of your entity, the buyer becomes the owner of your entity’s assets. Shares in an LLC are called “membership interests,” but for the sake of simplicity, most parties refer to the transaction as a stock sale.
  3. Merger Agreement: A merger happens when two entities merge into one another, with one entity surviving. Mergers are rare in the middle market.

The Definitive Purchase Agreement (DPA)

The DPA is called “definitive” because it’s the final or definitive agreement signed between the parties. This replaces any previous agreements, such as an LOI or offer to purchase. A definitive purchase agreement can take any form – asset, stock purchase, or merger. The term DPA is often used when the parties don’t know what form the transaction will take.

When the Purchase Agreement Is Signed

The purchase agreement is rarely signed before the closing when the change of possession occurs. That’s when the bill of sale is signed and delivered to the buyer in an asset sale, or when the stock certificates are signed in a stock sale. If the DPA is signed prior to closing, contingencies will usually remain, such as approval by key third parties, including the lender, lessor, franchisor, or licensor. The sale is canceled if these contingencies aren’t satisfied before the scheduled closing date or before the DPA expires. If the purchase agreement is signed before closing, the purchase agreement must also contain pre-closing covenants that govern how the business will operate before the closing, and termination rights, such as a material adverse change (MAC) clause. Both clauses are heavily negotiated and present a tremendous amount of risk to both parties, which is why the purchase agreement isn’t normally signed until closing.