Asset purchase vs. stock purchase options are beneficial to buyers and sellers when used correctly. However, this type of business transaction requires careful consideration since they affect a company’s assets, liabilities, ownership, and taxation.
This article discusses the differences between asset and stock purchases and the notable advantages and disadvantages of these types of business purchase agreements .
Differences Between an Asset Purchase vs. Stock Purchase
The primary difference between an asset purchase vs. stock purchase is that an asset sale is the acquisition of a businesses’ assets, as opposed to purchasing the business entity . In contrast, a stock sale is the acquisition of shares issued by a business entity. The transaction’s composition can significantly impact both the buyer and the seller’s future.
Other variables, such as the business’s legal structure and industry, can influence the decision. Both parties must consult with an acquisitions lawyer early to fully understand relevant legal issues and reach a formalized agreement that achieves their primary objectives.
What are Asset Purchases?
Asset purchases are when a buyer acquires a business’s assets. These assets can include tangible and intangible formats, such as equipment and trademark rights. Essentially, an asset purchase allows buyers to select which assets they wish to acquire versus purchasing an entire company.
The transaction may include acquiring the company’s name, or the buyer may use the assets to establish a new enterprise. There is tremendous flexibility afforded to the buyer. Transactions generally initiate with a Letter of Intent and finalize with a Bill of Sale .
Advantages of an Asset Purchase
Asset purchases generally favor buyers. Three key advantages of an asset purchase include:
Advantage 1. Selectively Purchase Assets
Buyers have the option of specifying the liabilities it is willing to assume while leaving the remaining liabilities with the selling company. This advantage contrasts with a stock purchase, which involves purchasing the entire company.
Advantage 2. Seller Pays Capital Gains Tax
The seller must pay taxes on the sale’s gains, while buyers do not have any taxable events at the time of the purchase. Additionally, buyers may immediately begin depreciating the assets. As such, they can deduct the asset’s cost from their taxes, resulting in a lower tax bill.
Advantage 3. No Liability
The buyer is purchasing assets, not a business, in an asset purchase. As such, they are not responsible for the company’s liabilities, which saves time, money, and mitigates risk. It is also the primary reason buyers prefer asset sales.
Disadvantages of an Asset Purchase
Asset purchases aren’t entirely perfect, either. Three critical disadvantages of an asset purchase include:
Disadvantage 1. Expensive & Time-Consuming
Asset sales are time-consuming and expensive for sellers when only some assets sell. While you can address some legal issues via a transfer agreement , they can become challenging to negotiate.
Disadvantage 2. No Termination
If your objective is to sell the entire business, an asset sale will not automatically terminate the business. Following the asset sale, you will need to determine how to handle the remaining assets and liabilities of the business.
Disadvantage 3. Third-Party Approval
Transferring contracts as part of an asset sale requires the consent of a third party. Other asset transfers may become impossible to execute. For example, specific intellectual property transfers may require government filings or approvals, and government permits may be non-transferable. You can typically use an intellectual property assignment agreement .
It would be best to discuss the enforceability of non-competition agreements with your legal counsel to avoid claims.
This web page also discusses asset purchases.
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What are Stock Purchases?
Stock purchases are when a buyer purchases a company’s shares. The buyer takes ownership and control of the business, typically continuing operations. They also acquire all assets, liabilities, and obligations, whether known or unknown.
It is critical to exercise due diligence thoroughly since the financial and legal risk involved is exceptionally high.
Advantages of a Stock Purchase
Stock purchases generally favor sellers. Three essential advantages of an asset purchase include:
Advantage 1. Turnkey Operations
Stock purchases help buyers take all company assets and the company in a turnkey manner. There are no additional efforts required for asset retitling, contract assignment, or establishing new bank accounts, among other things.
Advantage 2. No Third-Party Consent
The buyer will benefit from seller-assigned contracts, existing licenses and permits, and will not have to worry about obtaining third-party consent.
Advantage 3. Transferable Goodwill
The buyer gains access to the entity’s goodwill and credit history by purchasing stock. This benefit includes obtaining favorable finance terms and piggybacking off of brand awareness, elements that companies can take more than a lifetime to build.
Disadvantages of a Stock Purchase
Much like asset purchases, stock purchases have their flaws, too. Disadvantages of an asset purchase agreement include:
Disadvantage 1. Stockholder Coordination
Your business may have a large number of stockholders. Some of them may be difficult or impossible to contact, making coordination tricky. Buyers typically seek to own 100 percent of a target’s outstanding equity. An absent holder or a smallholder opposing the transaction may thwart the buyer’s efforts to accomplish that goal.
Disadvantage 2. High Risk for Buyers
Not all liabilities are identifiable when the transaction closes, meaning you may not know what may arise after the transaction is closed. This situation could give rise to expensive lawsuits, despite required disclosures in the asset transfer agreement .
Disadvantage 3. Assumption of Debts and Liabilities
Along with the company’s stock, the acquiring company also acquires the company’s debts and liabilities. Before signing an agreement, they should conduct extensive due diligence measures to avoid taking on unknown issues.
Why Do Buyers Prefer Asset Sales?
Buyers prefer asset sales over stock sales as they mitigate potential future risk. Asset sales can help acquiring companies avoid civil lawsuits, breach of contract disputes, warranty claims, and more. They are also helpful to buyers since asset sales are typically not cash-based, and the seller typically retains any long-term debt obligations.
Tax Treatment: Asset Purchases vs. Stock Purchases
Tax treatments are critical for buyers and sellers to consider, as they can influence how the transaction is structured. A buyer must carefully consider circumstances in which a C Corp target company possesses tax implications that provide future benefits.
Asset Purchase Tax Implications
Tax implications do not transfer to the buyer in an asset purchase. Sellers should exercise caution in cases where the target company possesses significant tax implications. The target company may use these tax benefits to offset any gains in connection with the transaction.
Stock Purchases Tax Treatments
Tax liability generally transfer to the buyer for future use in a stock purchase. However, if the stock purchase results in a change in ownership of more than 50 percent over three years, the tax implications should be evaluated further to determine whether the buyer is subject to any restrictions under Internal Revenue Service (IRS) Code Sections 382 or 383 that may limit the buyer’s ability to use them.
Since a stock purchase generally results in a change of ownership, it may benefit sellers to structure the transaction as an asset sale rather than a stock sale. Parties can take advantage of the tax implications and seek an advantageous tax structure.
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