Choosing the Right Deal Structure - SPA vs. APA Explained

Introduction

When navigating mergers and acquisitions (M&A), selecting the right deal structure is one of the most critical decisions both buyers and sellers face. The two most common frameworks - Share Purchase Agreements (SPA) and Asset Purchase Agreements (APA) - each come with unique benefits, risks, and tax implications.

In this article, we’ll break down the differences between these two structures, highlight real-world considerations, and explore how Devonshires supports clients through even the most complex M&A transactions.

Understanding SPAs

A SPA involves acquiring all or a portion of a company’s shares directly from the shareholders. In the case of all of the company’s shares being acquired, this will effectively transfer ownership of the company in its entirety - meaning the company continues to hold its assets, liabilities, employees, and existing contracts and only it’s owners will have changed.

Advantages:

• Business Continuity: The legal entity remains unchanged, making it easier to maintain ongoing contracts and operations.
• Brand & Relationships Maintained: Relationships with suppliers, customers, and employees are generally unaffected.
• Clean Exit: The seller can often sell the entire business in one transaction, including all liabilities.
• Flexibility in Deal Structure: Allows for earnouts, deferred payments, or retention-based clauses tied to company performance.
• Established Credit & Contracts: The company retains its credit rating, historical financials, and legal standing, which may be advantageous for ongoing business.
• Simplified Process: Fewer third-party consents are typically needed, making the transaction more straightforward.
• Control of the Company: The buyer gets full control, including over all contracts, licenses, and employees.
• Tax Efficiency: Sellers may benefit from capital gains tax treatment.

Disadvantages:

• Inherited Liabilities: The buyer assumes all existing - and potentially unknown - liabilities meaning any previous regulatory, environmental, or compliance issues remain with the company and become the buyer's responsibility.
• Thorough Investigation Required: Because all liabilities are inherited, the buyer must perform extensive legal, financial, tax, and operational due diligence. This can be a lengthy and expensive process that is time-consuming and costly.
• Contract Termination Risks: Some contracts, licenses, or government approvals may have change-of-control provisions that trigger renegotiation or termination.
• Employee Concerns: Change of control might trigger key employee departures or obligations under employment contracts.
• Complicated Shareholding Structure: If 100% of the shares are not acquired, dealing with minority shareholders can be difficult.
• Shareholder Agreements: Existing agreements may include restrictive clauses, like rights of first refusal, tag-along rights, or drag-along provisions
• Pending Legal Cases: Ongoing or potential lawsuits may surface after the transaction.
• Tax Audits or Regulatory Investigations: Buyers assume risk for any future audit findings tied to past conduct.
• Misalignment in Culture: Post-acquisition integration can be challenging if the buyer and target operate differently.
• Internal Resistance: Existing employees or management may resist changes brought by the new ownership.

Understanding APAs

An APA involves purchasing specific assets and liabilities of a business, rather than its shares. This structure allows for greater flexibility and control over what the buyer is taking on, and sometimes more importantly what the buyer is not taking on.

Advantages:

• Selective Acquisition: Buyers can “cherry-pick” only the assets and liabilities they want.
• Clean Break: The buyer doesn’t inherit the entities historical legal or regulatory issues and so these risks remain with the seller.
• More Control Over Terms: Buyers can negotiate terms asset-by-asset, including which employees, contracts, or leases to assume.
• Valuation by Component: Since assets are acquired individually, each one can be appraised and priced specifically, allowing for more granular valuation.
• Reduced Risk Exposure: Unwanted liabilities can typically be left behind.
• Possibly no Shareholder Approvals: Typically avoids complications from minority shareholders or complex shareholding structures that are present in share deals. However any shareholders agreement or governing documents of the company would need reviewing to confirm this.
• Tax Benefits: Buyers may benefit from (i) asset depreciation or a “step-up” in basis; or (ii) structuring the deal to meet strategic or tax planning needs i.e. through subsidiaries or SPVs (special purpose vehicles).

Disadvantages:

• Complex Transfers: Each asset may need to be individually transferred, often requiring multiple third-party consents.
• Disruption Risks: Contracts and employees may need to be reassigned or rehired, creating operational friction.
• Tax Disadvantages for Sellers: May result in double taxation - once at the company level and again when funds are distributed to shareholders.
• Employment Agreements Not Automatic: Employees are not automatically transferred; this may trigger severance, renegotiation, or rehire requirements.
• Loss of Key Talent: There’s a risk that critical employees won’t agree to move over.
• No Automatic Transfer of Business Identity: The buyer may not get the full goodwill or brand continuity unless specifically purchased, meaning that customer and vendor relationships may need to be re-established under the buyer’s name.
• Business Interruption Risk: Certain licenses or regulatory approvals/consents may not be assignable, leading to operational delays.

Key Differences Between SPAs and APAs

Factors Influencing Deal Structure Choice

Several factors shape the decision between a share sale and an asset sale:

• Nature of the Business: Highly regulated or IP-heavy businesses often favour SPAs for continuity.
• Risk Tolerance: Buyers seeking risk mitigation often lean towards APAs.
• Tax Strategy: Both parties must consider jurisdiction-specific tax consequences.
• Third-Party Consents: APA deals typically involve more negotiation and paperwork.
• Strategic Objectives: What is the buyer trying to achieve? Immediate integration or isolated asset acquisition?

Real-World Scenarios

Scenario 1: A manufacturing company is in financial trouble and looking to sell its equipment and inventory but has outstanding debts and pending lawsuits.

Recommended Approach: Asset Purchase Agreement (APA)

Why: Buyer can avoid taking on liabilities like debt or legal claims. Assets can be cherry-picked (e.g., valuable machinery, IP), leaving behind toxic obligations. Often preferred in bankruptcies or fire sales. You're worried about legacy liabilities

Scenario 2: A large tech company wants to acquire a start-up solely for its patented technology and a few key engineers.

Recommended Approach: Asset Purchase Agreement (APA) or Share Purchase Agreement (SPA)

Why: 

APA: Buyer is only interested in specific assets: patents, codebase, and maybe a few employment contracts. No need to assume company’s legal entity, early investors, or prior obligations. 

SPA: The company has valuable IP or licenses and moving them may not be tax efficient. The sellers may want to exit efficiently and have a clean break. Tax advice will play an important role here as to how the transaction is best structured. 

Scenario 3: A regional dealership group wants to buy a single-location car dealership.

Recommended Approach: Asset Purchase Agreement (APA)

Why: Automotive dealership licenses, inventory, and branding can be selectively acquired. Avoids risks tied to previous warranty claims, lawsuits, or financing irregularities. You only want specific assets

Scenario 4: Company A is selling one of its non-core subsidiaries (e.g. a software arm) as part of a divestiture strategy. 

Recommended Approach: Share Purchase Agreement (SPA)

Why: The subsidiary is a separate legal entity-SPA allows for simple transfer of ownership. Buyer gets all contracts, employees, and systems in place. You want business continuity and minimal disruption

Conclusion

Choosing between a share purchase and an asset purchase is far from a one-size-fits-all decision. The optimal deal structure depends on a variety of factors: from liability exposure and tax efficiency to regulatory concerns and long-term strategic goals.

Understanding the distinctions between SPAs and APAs is crucial, but legal expertise makes the real difference. Working with a team like Devonshires ensures your deal is structured correctly from the outset and allowing you to have the confidence to close.

If you're considering an M&A transaction or exploring your options, don't wait until the last minute. Get in touch with our experienced M&A legal team today for strategic, clear, and commercially sound advice. The Devonshires’ M&A legal team has deep experience guiding buyers and sellers through complex structuring processes. Get in touch with Prasan Modasia and Helen Curtis to discuss your transaction today.

This article is part of our Legally FM article series, to read more from this series please click here.