There are basically two methods used by a purchaser willing to acquire a business (the“target” or the “target business”):
• the acquisition of the underlying assets of that business; and
• the purchase of the shares of the corporation that owns the assets and operates the business.
In many transactions, the purchaser and the vendor will execute a letter of intent. Depending on the stage of negotiations, a letter of intent can be either binding or non-binding. The majority of letters of intent are drafted to be non-binding and if the purpose of a letter of intent is merely to set forth the intention of the parties—and not to create a binding agreement—then the letter of intent should express that thought clearly.
In an asset transaction the purchaser is able to select only those assets which it wishes to purchase as well as only the accompanying liabilities. Remaining liabilities—and in particular unknown liabilities—will, unless expressly assumed, remain the responsibility of the vendor. By contrast, in a share acquisition, by virtue of acquiring shares of a corporation, the purchaser acquires the corporation itself, with all of the underlying assets of that corporation together with all of its liabilities, both known and unknown. Typically, this is often referred to as buying the “skeletons in the closet” or buying the business “warts and all”. While it is difficult to generalize, a vendor will normally wish to sell the shares of a corporation so as to avoid being left with unwanted assets or liabilities; a purchaser may want to purchase assets to avoid unwanted assets and unknown liabilities.
by Ryan Carson