Asset Purchase vs Stock Purchase

Parties to a deal often benefit from opposing deal structures. Deciding between asset or stock acquisitions allows the buyer and seller to tailor the transaction to their individual needs.

Asset Purchase vs Stock Purchase

When buying or selling a corporate business, a business manager has a choice: is the transaction to be a purchase and sale of assets or a purchase and sale of corporate stock? The buyer of the assets or stock (“Acquirer”) and the seller of the business (“Target”) will be motivated to different answers to this question.

Most acquisitions can be consummated either as an asset or a stock transaction. Where an asset transaction is favored, a variety of issues must be considered as the transaction is truly one of the sale of each of the individual assets and an assumption of agreed upon liability.

Conversely, where the transaction is structured as a stock acquisition, by its very nature the acquisition results in a transfer of the ownership of the business entity itself, but the entity continues to own the same assets and have the same liabilities.

Asset Purchase

In an asset sale, the seller retains possession of the legal entity and the buyer purchases individual assets of the company, such as equipment, fixtures, leaseholds, licenses, goodwill, trade secrets, trade names, telephone numbers, and inventory. Asset sales generally do not include cash and the seller typically retains the long-term debt obligations. This is commonly referred to as a cash-free, debt-free transaction. Normalized net working capital is also typically included in a sale. Net working capital often includes accounts receivable, inventory, prepaid expenses, accounts payable, and accrued expenses.

Advantages of an Asset Purchase

  • A major tax advantage is that the buyer can “step up” the basis of many assets over their current tax values and obtain ordinary tax deductions for the depreciation and/or amortization deductions.
  • Goodwill, which is the amount paid for a company less its tangible assets, can be amortized on a straight-line basis over 15 years for tax purposes in an asset transaction. In a stock deal, if an acquirer were buying shares of a target, the goodwill cannot be deducted until the stock is sold by the buyer.
  • The buyer can dictate what, if any, liabilities it is going to assume in the transaction. This limits the buyer’s exposure to liabilities that are either unknown or not stated by the seller. The buyer can also dictate which assets it is not going to purchase. This is often advantageous if the seller has a lot of accounts receivable that the buyer does not believe will be collected.
  • Because the exposure to unknown liabilities is limited, the buyer typically needs to conduct less due diligence.
  • Minority shareholders that don’t want to sell may be forced to accept the terms of an asset sale.
  • The buyer can select which employees they want to offer jobs without impacting their unemployment rates.

Disadvantages of an Asset Purchase

  • Contracts – especially with customers and suppliers – may need to be renegotiated and/or novated.
  • The tax cost to the seller is typically higher, so the seller may want a higher purchase price.
  • Assignable contract rights could be limited.
  • Assets may need to be retitled.
  • Employment agreements with key employees may need to be rewritten.
  • The seller still needs to liquidate any assets not purchased, pay any liabilities that have not been assumed, and negotiate any leases that need to be terminated.

Stock Purchase

A stock purchase is simpler in concept than an asset purchase. Few distinctions (between wanted and unwanted assets or between assumed and un-assumed liabilities) need, or can, be made. The Acquirer buys all the stock of the Target and takes the corporation as it finds it. All of the target corporation’s assets remain subject to all its liabilities. Many contract, lease, and franchise rights and permits remain in place (and in effect transfer automatically), although some sophisticated pre-existing agreements with third parties may require their consent to continuation after a transfer of control of the corporation.

Advantages of a Stock Purchase

  • The acquirer doesn’t have to bother with costly valuations and retitles.
  • In most cases, buyers can assume non-assignable licenses and permits without consent.
  • Buyers may also be able to avoid paying state and transfer taxes.
  • More simple and common than an asset acquisition. For example, hedge funds are known for conducting M&A transactions, particularly in the form of a simple stock purchase.

Disadvantages of a Stock Purchase

  • The main disadvantage is that an acquirer receives neither the “step-up” tax benefit nor the advantage of handpicking liabilities.
  • All asset and liabilities transfer at carrying value.
  • The only way to eliminate unwanted liabilities is to contractually sell them back to the target.
  • Securities laws can complicate situations involving a large number of shareholders.
  • It may be difficult to convince some stockholders to sell their shares.
  • Goodwill is not tax deductible.

Choosing a form of transaction can have significant tax and non-tax consequences for both buyer and seller. Both buyer and seller should explore consequences of the transaction with professional advisers before proceeding.

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