When you decide to purchase a company, you can do it one of two main ways: through an asset purchase or a stock purchase. Both have advantages and disadvantages, but you must consider this question during the early stages of your transaction in order to ensure that the deal is structured efficiently. Consulting an M&A attorney from the Priori network before beginning negotiations can help you decide which may be better for your company at this time.
What Are Stock Purchases vs. Asset Purchases?
When you decide to buy a business, you can gain control of the business through an asset purchase or through a stock purchase. In an asset purchase, you buy the business by purchasing the assets used by, necessary for or comprising that business. Depending on how the transaction is structured, an asset purchase allows you to purchase the seller’s entire business, e.g. everything from small tangible assets like staplers and chairs to key assets like real estate, or a targeted portion of that business, e.g. all intellectual property and related rights of the business. The point is that the seller’s company remains legally intact and controlled by the seller, but some or all the assets of the company are transferred to the buyer.
In a stock purchase, you buy all outstanding shares—or a controlling share—of the legal entity that owns the business assets. Accordingly, in a stock purchase, you acquire control of all the legal entity that owns the business assets you’re interested in. This means you acquire all assets, liabilities and obligations of the legal entity, except for any assets, liabilities or obligations that are specifically prohibited from being transferred via a change of control
Advantages of Stock Purchases
The following are the biggest advantages of stock purchases for the buyer:
- Simpler to carry on operations as normal. When you effect a stock purchase, most existing arrangements with employees, customers and suppliers remain intact. Unless contracts include a change-of-control provision, you won’t need to renegotiate the businesses contracts nor will you have to handle the mechanics of transferring title to business assets.
- Contracts remain intact. Unless contracts include a change-of-control provision, you can obtain the company's nonassignable contracts, permits, and licenses without the consent of third parties to the contract, permit, or license.
- Unique tax benefits. Stock purchases can sometimes qualify as a tax-free reorganization or avoid sales and transfer taxes on the sale of assets.
Advantages of Asset Purchases
The following are the biggest advantages of asset purchases for the buyer:
- Limited liability. You can structure the transaction such that you acquire the assets you want and avoid assuming unwanted or unknown liabilities of the seller’s company, including contingent liabilities like product liability, environmental liabilities, litigation, product warranty issues, and employee lawsuits.
- Lower taxes. Asset purchases often mean lower taxes for the buyer in the future, because of a step-up in the tax basis of the assets, which creates depreciation deductions.
How to Decide Which Option Is Right for Your Company
There is no simple way to decide which way to make the acquisition is better for you in the long run. A detailed due diligence, sound counsel, and careful consideration will allow you make the best decision possible. Often, buyers prefer asset purchases and sellers prefer stock purchases, but this will vary greatly depending on the specific circumstances of the case.
IRC Section 338 Election
Tax concerns can make sellers strongly opposed to asset purchases, but a buyer usually benefits more from such a purchase. In order to minimize the tax consequences, an Internal Revenue Code (IRC) Section 338 election can sometimes be used to make stock purchases more attractive to you as a buyer. If you acquire 80% of the vote and value of the company you acquire’s stock, you can make a qualified stock purchase using an IRC Section 338 election. This allows you to treat the acquisition as an asset purchase rather than a share acquisition for federal tax purposes, so that the tax basis of the assets is stepped up to the purchase price. It’s important to remember, though, that the tax concerns are only a part of the ultimate decision of which option to choose.
Depending on the deal, pricing can vary widely. When you hire a lawyer in the Priori network, hourly rates for this type of transaction can typically start at $225 per hour but range significantly higher based on certain types of experience. In order to get a better sense of cost for your particular situation, put in a request to schedule a complimentary consultation and receive a free price quote from one of our lawyers.
Do stock purchases or asset purchases better limit my liability?
Generally, it is easier to avoid unwanted liabilities through asset purchases; however, any deal can be structured to limit your liabilities. If you are concerned about the liabilities an acquisition opens you up to, you should discuss it with your M&A attorney.