When buying or selling a business, the buyers and sellers have to decide whether the transaction will be for the company’s assets or stock. This is an important choice for both parties to make as there are legal, tax, and business considerations attached both options. We will walk you through the advantages and disadvantages of each type of agreement to help you decide which option fits your M&A goals.
Asset Purchase
In this type of transaction, the buyer purchases the individual assets of the company, such as equipment, licenses, goodwill, customers lists, or inventory. This type of sale is characterized as a cash-free and debt-free acquisition, as the buyer typically won’t acquire either. Since the sellers are only selling the company’s assets, they typically will retain ownership in the company after the transaction is completed. With a basic understanding of what an asset purchase entails, next we’ll look at some of the advantages and disadvantages of this transaction type.
ADVANTAGES
· The buyer receives a step-up in basis for many of the major acquired assets, such as real estate and inventory. This allows the buyer to retain the benefit of higher tax deductions and limits the taxable gain when they decided to resell the asset.
· Any amount paid for goodwill can be amortized, on a straight-line basis, over a 15 year period. This allows for the buyer to take advantage of the latest tax deductions.
· The buyer does not assume the company’s liabilities which can protect them from potential liability issues.
· Seller has the ability to take advantage of assets with higher bases to limit the taxes they will incur from the transaction.
· Can be more cost effective as there tend to be fewer steps involved in this type of transaction.
DISADVANTAGES
· Customer contracts may need to be renegotiated since the entity will be retained by the seller.
· Employee contracts may need to be renegotiated since the entity will be retained by the seller.
· Since assets depreciate over the business’ lifetime, they typically incur higher tax liabilities.
· Seller will need to liquidate assets not purchased by the buyer and manage any remaining contracts.
Stock Purchase
Generally, a stock purchase is the simpler of the two transaction types. The buyer purchases the stock of the target company and assumes the associated assets and liability. This can include: existing customer contracts, leases, permits, and licenses as laid out in the original agreements.
ADVANTAGES
· Buyer typically assumes all non-assignable licenses, contracts, leases, and permits.
· Seller does not retain any outstanding liabilities.
· Seller may be able to take advantage of different tax rates depending on the capital gains rates and their individual tax plan.
· Less complicated deal structures since the buyer is purchasing the entire entity instead of parts of it.
DISADVANTAGES
· Buyer will be required to invest in a more thorough due diligence phase of the acquisition due to the assumption of liabilities.
· Buyer does not receive a step-up in basis in the company’s assets.
· Minority shareholders may refuse to sell their shares in the company if there are no buy-out provisions in the company bylaws.
· Security law issues may arise depending on the size and/or structure of the company and if any of the parties are publicly traded entities.
Which Deal Works For You?
The type of deal that a buyer or seller should choose depends on their financial position, buying/selling goals, and the potential risks involved. Buyers tend to want an asset purchase since all assets receive a step-up in basis. Sellers have more incentive to want a stock purchase since they will be relieved of all liabilities and assets. A mergers and acquisitions firm, such as Seck Advisor Group, can help you understand which deal fits your needs, and can help ensure that you maximize the value of whichever transaction you decide on.