Asset Purchase vs Stock Purchase
Pros and cons of each deal type
Pros and cons of each deal type
When buying or selling a corporate 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”) will be motivated to different answers to this question. This guide compares the Asset Purchase vs Stock Purchase decision in more detail.
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 actually a sale 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 has the same liabilities.
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 purchase agreement. Net working capital often includes accounts receivable, inventory, prepaid expenses, accounts payable, and accrued expenses.
Here are several advantages of an asset purchase vs stock purchase:
Here are several disadvantages of an asset purchase vs stock purchase:
Now, the other side of an Asset Purchase vs 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. Most contracts, 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. For these reasons, it’s often more straightforward to go with an Asset Purchase vs Stock Purchase.
Here are several advantages of a stock purchase vs asset purchase:
Here are several disadvantages of a stock purchase vs asset purchase:
Choosing a form of a 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.
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 these additional resources below:
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