In a stock acquisition, a buyer acquires a target company’s stock directly from the selling shareholders. With a stock sale, the buyer is assuming ownership of both assets and liabilities – including potential liabilities from past actions of the target. The buyer is merely stepping into the shoes of the previous owner and the business continues on. Compare this to the other method of acquisition, an asset deal.
After the closing of the stock acquisition, the target will continue as it existed prior to the acquisition with respect to its ownership of assets and liabilities, albeit as a subsidiary of the acquirer.
What factors are taken into consideration?
A stock acquisition includes everything on the balance sheet, both assets and liabilities. A stock sale involves buying the entire entity, so past financial and legal liabilities are included, creating significant exposure for the buyer. Thus, financial debt and legal risk could play a factor in reducing the purchase price of the sale.
In a stock acquisition, a buyer acquires a target company’s stock directly from the selling shareholders. Under this structure, the buyer is assuming ownership of all of the target’s assets and liabilities, including potential liabilities from past actions of the target.
A stock acquisition differs from an asset acquisition in many ways, the most notable of which is that there are usually better tax-reduction options via an asset acquisition. However, a stock acquisition is usually more practical and easier transact.
If the target business depends heavily on certain licenses, or on key customer or distribution agreements, the buyer may prefer a stock acquisition to ensure that all of the licenses and agreements transfer with the sale.
A stock acquisition is not subject to the Bulk Sales Act. In a stock sale, the buyer assumes the current depreciation schedule of assets and the existing tax status of the corporation. Loans to the owner and personal liabilities are normally removed. One reason for a stock sale is when there is a right, license, or exclusive distributorship that cannot be otherwise transferred.
Further, there is no purchase price allocation issue to deal with from a tax perspective. The tax attributes of the assets and liabilities in a stock acquisition get a carryover basis for tax purposes. Carryover basis means that the buyer steps into the shoes of the target and continues to account for the assets and liabilities as if the target had no change in ownership. Therefore, if goodwill or any other intangible asset is recorded for Generally Accepted Accounting Principles (GAAP) purposes in a stock deal, then the intangible asset has no basis for tax purposes. The target may have other tax attributes, such as net operating losses or credit carryovers, which may be restricted in the acquirer’s hands.
With a stock acquisition, the owner is treated as making a disposition of a capital asset and any proceeds will receive capital gains treatment, generally taxed at 0 – 23.8%, but dependent on the owner’s income.
How are stock acquisition strategies used?
In considering a stock acquisition, a buyer may see the potential for growth in value of the company’s stock as it stands and/or may feel that the current and future liabilities of the business are minimal or can be adequately managed. Since the buyer in a stock sale takes all of the business assets as a whole without the necessity of transferring ownership of each one, the buyer may prefer a stock sale if the transfer of individual assets may prove to be impractical or costly. These strategic decisions are part of the duties of corporate finance roles.
For example, if the business depends heavily on certain licenses, or on key customer or distribution agreements, the buyer may prefer a stock acquisition to ensure that all of the licenses and agreements transfer with the sale. Also, in cases involving high asset transfer fees, such as sales that involve the transfer of title to a fleet of vehicles, the buyer will generally avoid those costs by pursuing a stock sale. Finally, in some instances, if both the buyer and seller are C corporations, the transaction may qualify for tax treatment as a tax-free reorganization.
Thank you for reading CFI’s guide to a stock acquisition. To learn more about mergers and acquisitions, see the following CFI resources: