Transaction Support

Company Acquisitions – Assets vs. Stock

Posted on April 12, 2016 by

Margaret Amsden

Margaret Amsden

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When making a business acquisition, one of the key factors to be considered is whether the transaction will be an asset purchase or stock purchase. This may be difficult to agree upon because the buyer and seller benefit from opposing structures. In general, buyers prefer to purchase assets, and sellers prefer to sell stock.

Assets vs. Stock – What’s the Difference?

An asset transaction is the purchase of individual assets and liabilities of a business; whereas a stock transaction is the purchase of the shares of a corporation. If the entity involved is a sole proprietorship, partnership, or a limited liability company (“LLC”), a stock transaction is not an option because these entity types do not issue stock. As an alternative, owners of these entity types can sell their partnership or membership interests.

What should be considered?

While there are many factors to be considered when structuring a transaction, the tax implications and the assumption of potential liabilities are typically the primary concerns. Each set of circumstances present different issues that may positively or negatively impact the parties involved and influence the structure of the transaction. It is helpful to look at the transaction from the perspective of the seller and buyer in each case.

Stock Purchases

Seller’s Perspective Buyer’s Perspective
  • Opportunity to “walk away” from the business and majority of obligations associated with past and future business operations.
  • Proceeds are taxed at the lower capital gains rate.
  • Typically less responsibility for future liabilities, depending on the terms of the purchase agreement.
  • Potential to avoid some or all state sales or transfer taxes on the sale of assets.
  • Purchase price creates basis in the stock acquired and therefore does not result in a “step-up” in the basis of the target’s assets.
  • Additional risk may be taken on, including contingent risk that may be unknown or undisclosed at the time of the sale (typically these are mitigated in the purchase agreement by representations, warranties, indemnifications, and escrowed funds).
  • Easier to maintain contracts, such as real estate lease agreements, due to the fact the buyer is “stepping into the shoes” of the seller in a stock purchase.
  • Potential for issues with minority shareholders who refuse to sell their shares.

Asset Purchase

Seller’s Perspective Buyer’s Perspective
  • Can result in higher taxes for the seller due to the gain on sale of some assets. Is taxed at higher ordinary income tax rates (e.g., accounts receivable for a cash basis taxpayer, depreciation recapture on tangible assets) rather than the capital gain rates that apply to a stock purchase or the sale of some intangible assets, such as goodwill.
  • Potential for double taxation in the case of C Corporations, or S Corporations with Built-in-Gains.
  • Ability to pick and choose the assets which they wish to purchase, such as a particular piece of equipment.
  • Easier to avoid assumption of unwanted liabilities, such as an unfavorable contract or pending litigation.
  • Assuming the purchase price exceeds the aggregate tax basis of the assets being acquired, the buyer receives a “step-up” in basis on the assets purchased resulting in additional depreciation and amortization deductions and a greater return on investment.

In addition to the advantages and disadvantages above, there are other factors to consider. For example, asset sales are typically less complicated from a securities law perspective because the parties are generally not required to comply with state and federal securities laws. If the selling company is closely-held with few shareholders, a stock sale could be less complicated. The company’s structure, customer contracts, and the respective industry can also influence whether a stock sale or an asset sale is the best option.

Since every sale involves a unique set of circumstances, it is important to diligently evaluate each transaction to determine the appropriate structure. Early in the process, both parties should consult with their business advisors, including legal counsels and accounting professionals, to fully understand the options that will yield the best result.

Margaret Amsden

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Leading the firm’s private client services group, Margaret’s strategic & educational approach fosters a culture of learning among clients and colleagues.

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