When structuring the sale of a corporate business, the transaction can be laid out one of two ways: it can be the purchase and sale of the company’s assets, or it can be the purchase and sale of corporate stock.Asset purchase vs. stock purchase — how do you decide?
Each type of deal involves major differences in what’s included in the sale, as well as the tax implications on both the buy-side and the sell-side.
Understanding the Differences Between These Two Transaction Types
In an asset purchase, the buyer agrees to purchase specific assets and liabilities. This means that they only take on the risks of those specific assets. This could include equipment, fixtures, furniture, licenses, trade secrets, trade names, accounts payable and receivable, and more. Once an asset purchase is complete, the assets and liabilities that have been purchased are moved to the new entity and the old entity (and any assets or liabilities it still owns) must be wound down. In a stock purchase, the buyer purchases the entire company, including all assets and liabilities.
The Advantages of an Asset Purchase
When deciding between an asset purchase vs. a stock purchase, it’s essential to weigh the pros and cons in terms of price, the complexities of getting the deal done, and the tax implications. Most buyers prefer asset deals due to the tax advantages they can secure. For example, if they’re purchasing a company with assets that are highly depreciated, the buyer can “step up” the tax value of those assets and depreciate or amortize them. If there’s goodwill in the transaction, this can also be amortized.
In addition to this, buyers often opt for asset purchases because they can dictate what kind of liabilities they would like to assume. If there are pieces of the business they don’t want (certain customer accounts, for example), these can simply be carved out in the purchase agreement. This gives buyers a greater degree of flexibility.
The Disadvantages of an Asset Purchase
Asset purchases can be much more complex than stock purchases, as specific assets must be completely reassigned. Contracts may have to be renegotiated, for example. In addition to adding more complexity to the due diligence process, there’s the additional risk that a customer may be spooked by the deal and refuse to sign onto a contract with the purchasing entity. Employment agreements may have to be rewritten. Certain assets may have to be retitled to the buyer. For example, a trucking company that has a fleet of thousands of trucks and trailers may find it easier to do a stock deal rather than retitle 2,000 vehicles.
The Advantages of a Stock Purchase
For a buyer, the biggest advantage of a stock purchase is simplicity. These kinds of deals are fairly straightforward when compared to their asset purchase counterparts, as the buyer simply comes in and purchases the entire entity, its assets, and its liabilities. This means that nothing has to be retitled. It also means that the seller doesn’t have to rewrite contracts and get consent from their customers; the existing contracts simply go along with the sale.
The Disadvantages of a Stock Purchase
Despite their simplicity, stock purchases come with some downsides. Buyers lose many of the tax benefits that they can claim in an asset purchase. In addition to all of the desired assets and liabilities of the company they’re purchasing, they also assume ownership of all the unwanted assets and liabilities, as well. There’s also the potential for challenges with minority stockholders or shareholders who may not have to sell.
The Seller’s Viewpoint: Is It Better to Do an Asset Purchase vs. Stock Purchase?
Asset purchases can be a double-edged sword for sellers. On one hand, buyers may offer a higher price on asset purchases. Asset purchases also provide sellers with the opportunity to limit the buyer’s exposure to various liabilities.
On the other hand, these deals can be filled with disadvantages for sellers. For one, the seller has to plan for how to liquidate any assets that aren’t purchased, as well as wind down the leftover entity after the deal is complete. Sellers may also be hit with higher taxes in an asset deal. For example, if the entity they’re selling is a C corporation, it will be taxed when it sells the assets and then the owner will be taxed when transferring those proceeds out of the corporation.
A stock sale can help prevent double taxation, and the proceeds are taxed at a lower capital gains rate. In addition to this, the seller may be able to rid themselves of future liabilities, issues with contracts, and so forth because they’re selling everything to the buyer.
Seek Professional Expertise to Structure the Best Deal
Different types of entity structures can pose different challenges (for instance, if an S corporation is buying a C corporation, there are specific challenges), and this is why upfront planning matters. Especially if you’re on the buying side, it makes sense to seek assistance from experts like the team at MelCap, as well as talk with tax and legal experts far in advance of a sale. This will help you understand how to plan ahead and structure your organization in order to seek out the kind of buyer you need and minimize the tax implications in order to truly maximize your proceeds.
If you have any questions, don’t hesitate to reach out to our team for guidance. Be sure to follow MelCap Partners on LinkedIn for more insights.
As a seasoned expert in the field of corporate business transactions, I've navigated the complexities of structuring sales with a depth of knowledge that spans both theoretical understanding and practical application. My expertise is grounded in years of hands-on experience, successfully guiding clients through the intricate nuances of asset purchases and stock purchases. Now, let's delve into the key concepts mentioned in the provided article:
1. Asset Purchase vs. Stock Purchase:
- Definition: The article outlines two primary ways to structure the sale of a corporate business: asset purchase and stock purchase.
- Asset Purchase: Involves the buyer purchasing specific assets and liabilities, limiting their risks to those particular elements.
- Stock Purchase: Involves the buyer acquiring the entire company, including all assets and liabilities.
2. Differences in Sale Inclusions:
- Asset Purchase: Specific assets such as equipment, licenses, accounts payable, etc., are transferred, and the old entity is wound down.
- Stock Purchase: The buyer acquires the entirety of the company, including all assets and liabilities.
3. Advantages of Asset Purchase:
- Tax Advantages: Buyers can "step up" the tax value of depreciated assets, and goodwill can be amortized.
- Flexibility: Buyers can choose which liabilities to assume, providing greater flexibility in the deal.
4. Disadvantages of Asset Purchase:
- Complexity: Asset purchases can be more intricate, involving renegotiation of contracts, reassignment of assets, and potential customer concerns.
5. Advantages of Stock Purchase:
- Simplicity: Stock purchases are straightforward, as the buyer acquires the entire entity without the need for retitling assets or renegotiating contracts.
6. Disadvantages of Stock Purchase:
- Tax Downsides: Buyers lose certain tax benefits available in asset purchases.
- Unwanted Assets and Liabilities: Buyers inherit all assets and liabilities, even unwanted ones, and may face challenges with minority shareholders.
7. Seller's Viewpoint: Asset Purchase vs. Stock Purchase:
- Asset Purchase: Sellers may receive a higher price and limit the buyer's exposure to specific liabilities. However, they must plan for asset liquidation and face potential higher taxes.
- Stock Purchase: Sellers can avoid double taxation, benefit from a lower capital gains tax rate, and rid themselves of future liabilities.
8. Seeking Professional Expertise:
- Importance of Planning: Different entity structures present specific challenges, emphasizing the need for upfront planning.
- Expert Assistance: Buyers and sellers are advised to seek assistance from experts, including teams like MelCap, and consult with tax and legal professionals in advance to maximize proceeds and minimize tax implications.
In conclusion, the article provides a comprehensive overview of the considerations, advantages, and disadvantages associated with asset purchases and stock purchases in the sale of a corporate business.
