Asset Purchase vs Stock Purchase
Pros and cons of each deal type
Pros and cons of each deal type
When buying or selling a business, the owners and investors have a choice: the transaction can be a purchase and sale of assets or a purchase and sale of common stock. The buyer of the assets or stock (the “Acquirer”) and the seller of the business (the “Target”) can have various reasons for preferring one type of sale over the other. This guide examines the Asset Purchase vs Stock Purchase decision in detail.
Most acquisitions can be structured either as an asset transaction or as a stock transaction. Where an asset transaction is favored, a variety of issues must be considered – as the transaction is actually the sum of the sales of each of the individual assets and an assumption of agreed upon liabilities.
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.
In doing an asset sale, the seller remains as the legal owner of the entity, while the buyer purchases individual assets of the company, such as equipment, licenses, goodwill, customer lists, and inventory.
Asset sales generally do not include purchasing the Target’s cash, and the seller typically retains its long-term debt obligations. Such a sale is characterized as cash-free and debt-free.
Normalized net working capital is typically included in an asset purchase agreement. Net working capital is comprised of items such as accounts receivable, inventory, and accounts payable.
Here are several advantages of an asset purchase transaction:
Here are several disadvantages of an asset purchase as compared to a stock purchase:
A stock purchase is simpler in concept than an asset purchase. Therefore, in most instances it’s just basically an easier, less complex transaction.
The Acquirer buys the stock of the Target and takes the Target as it finds it, in regard to both assets and liabilities. Most contracts the Target has – such as leases and permits – effect, transfer automatically to the new owner. For all these reasons, it’s often more straightforward to go with a stock purchase rather than an asset purchase.
The following are several advantages of doing a stock purchase:
Here are some of the disadvantages of a stock purchase:
Choosing the form of an acquisition transaction can have significant tax and other business-related consequences for both buyer and seller. Both parties should explore and consider the benefits and consequences of each type of transaction, with the help of professional financial advisors, to determine whether an asset purchase or stock purchase transaction best suits their wants and needs.
This guide to evaluating an Asset Purchase vs Stock Purchase has highlighted the main pros and cons of each transaction type. To keep learning about other forms of M&A transactions, please see the following additional resources:
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