Stock vs. Asset Acquisitions: Which is Better?

There are many variables involved when a buyer decides to purchase a company. One of the major decisions is whether to purchase the assets of the seller or buy the stock or membership interest in the company. If you are considering opting for an asset purchase, here are some key advantages and disadvantages to keep in mind.

Advantages of an Asset Purchase

  • A major tax advantage is that the buyer can “step up” the basis of many assets over their current tax values and obtain ordinary tax deductions for the depreciation and/or amortization deductions. For example, if the seller has equipment worth $500,000 but the equipment is fully depreciated for tax purposes, a transaction that is treated as a stock sale cannot “step up” the basis to $500,000 for tax purposes since the seller has already depreciated the equipment.
  • Goodwill, which is the amount paid for a company less its tangible assets, can be amortized on a straight-line basis over 15 years for tax purposes in an asset transaction. In a stock deal, just like if you were buying shares of a company like IBM, the goodwill cannot be deducted until the stock is sold by the buyer.
  • The buyer can dictate what, if any, liabilities it is going to assume in the transaction. This limits the buyer’s exposure to liabilities that are either unknown or not stated by the seller. The buyer can also dictate which assets it is not going to purchase. This is often advantageous if the seller has a lot of accounts receivable that the buyer does not believe will be collected.
  • Because the exposure to unknown liabilities is limited, the buyer typically needs to conduct less due diligence.
  • Minority shareholders that don’t want to sell may be forced to accept the terms of an asset sale.
  • The buyer can select which employees they want to offer jobs without impacting their unemployment rates.

Disadvantages of an Asset Purchase

  • Contracts – especially with customers and suppliers – may need to be renegotiated and/or novated.
  • The tax cost to the seller is typically higher, so the seller may want a higher purchase price.
  • Assignable contract rights could be limited.
  • Assets may need to be retitled.
  • In Pennsylvania and most other states, the seller should obtain a bulk sales certificate. Otherwise, the purchaser could become liable for any unpaid taxes.
  • Employment agreements with key employees may need to be rewritten. 
  • The seller still needs to liquidate any assets not purchased, pay any liabilities that have not been assumed, and negotiate any leases that need to be terminated.

The Internal Revenue Code (IRC) Section 338 can be useful. This tax law allows the buyer to purchase the stock but the transaction is taxed as if it were an asset purchase. However, the seller has to pay the tax bill that arises from the step-up on the basis of assets, which occurs under asset purchase transactions. We often see this election used in purchases of service companies where the customer contracts may be difficult to novate or where the seller has leases and/or other contracts that the buyer does not want to renegotiate.

As you can see, there are many factors to take into consideration when weighing your acquisition method and the decision may not be an easy one. An advisor who is experienced with mergers and acquisitions can assist the buyer and/or seller throughout the process and help provide clarity.

 

David Shaffer, Kreischer MillerDavid E. Shaffer is a director with Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at Email

 

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