Craig S Steinberg, O.D., Esq. Optometric & Healthcare Law

Asset Purchase v. Stock Purchase

Like any other business, an optometry practice can be owned in any one of several forms. In a sole proprietorship the practice is owned by the individual doctor. This is the simplest business form of ownership. Whatever the "business" owns, the doctor owns, because the doctor and the business are one and the same. Similarly, in a partnership the practice is owned by two or more individual doctors, but, again, whatever the partnership owns, generally speaking, the individual partners own. If the partnership is sued, both of the partner-owners are potentially liable for any judgment.

Alternatively, the individual or individuals that own the practice may choose to own and operate it as a distinct and separate entity, either as a corporation or as a limited liability company (LLC) (for purposes of this discussion, the two forms are interchangeable). This concept confuses many people, but it shouldn't. The corporation issues shares of stock to the individual owner(s), and that is the only thing the individuals own -- shares of stock in the corporation. Everything else, e.g. the equipment, the inventory, etc., is owned by the corporation, not by the shareholders.

Thus, if a sole proprietorship optometry practice purchases a new OCT, it is the doctor that owns the practice that is buying and that owns the OCT. Legally speaking, "title" to the OCT is held in the name of the individual that owns the practice. If that person dies, ownership of the OCT passes to his or her heirs just like everything else that the deceased doctor owned.

In contrast, if a corporate optometry practice purchases the same new OCT, the OCT is owned by the corporation, and title to the OCT is held in the name of the corporation. The individual doctor(s) that are the shareholders of the corporation do NOT own the OCT. They have no ownership interest in any of the "things" that the corporation owns. The shareholder's own the corporation, and the corporation owns everything else. The OCT is an "asset" of that corporation, which increases the value of the shares of stock held by the shareholders, but the OCT is not owned by the shareholders. If the shareholder dies, the OCT continues to be owned by the corporation. It is only the shares of stock which pass to the heirs of the deceased doctor, and those heirs become the shareholder(s).

So, what happens when someone wants to buy an optometry practice? That depends on whether the practice being purchased is individually owned, or owned in the corporate or LLC form.  If the practice is individually owned, the transaction is simple: the owner sells the various assets of the business (e.g. the inventory, goodwill, equipment, furniture, etc.) to the buyer.

But, there are two ways to purchase a business that is a corporation. One way is to purchase the corporation's stock (or shares, or membership interests in the case of an LLC) from the current shareholder(s). This is accomplished through a Stock Purchase Agreement. The owner or owners of all the outstanding shares of the corporation's stock are sold to the buyer, and the buyer then owns the corporation. There is no change in the ownership of any of the assets of the corporation, no change in the corporation's tax ID number, account numbers, etc. The corporation is unchanged. It just has a new owner.

The problem with a stock purchase is that, because there is no change in the ownership of the business' assets, there is also no change in the responsibility for its debts and liabilities (both known and unknown liabilities, such as a potential lawsuit which has not yet been filed). For that reason, in most cases, the buyer of a corporate optometry practice will purchase the corporation's Assets, not the shares of stock in the corporation. By purchasing the assets from the corporation (not from the doctor/shareholder) the corporation continues to "own" its debts and liabilities. Typically the seller will collect the accounts receivable, pay off all remaining debts, then dissolve the corporation. 

Thus, the second way to purchase a corporate optometry practice, and the more common way, is through an Asset Purchase Agreement. In an asset purchase the buyer (which can be an individual or a buying corporation) purchases and acquires title to the assets of the selling business, but none of its debts or liabilities except for those debts or liabilities that are explicitly identified and assumed by the buyer. Click here for sample language you might see in the purchase agreement for an asset purchase.

The "assets" being purchased include the goodwill, furniture, fixtures, equipment, inventory, and everything else of value to the business. As a practical matter, in most cases the selling corporation retains its cash and accounts receivable, so it doesn't sell ALL of its assets, and the purchaser typically agrees to purchase and be responsible for some of the liabilities, such as an ongoing equipment lease or a yellow pages ad. But in an asset purchase agreement, unlike a stock purchase agreement, the buyer can choose exactly what it is buying and what it is not buying. That offers the buyer substantial protection from acquiring unknown or undisclosed debts or liabilities.