Asset purchase vs. share purchase

When buying or selling a business, owners and investors have a choice: the transaction can be the purchase and sale of assets or the purchase and sale of common stock.

The buyer of the assets or stock (the “acquirer”) and the seller of the business (the “target”) may have various reasons for preferring one type of sale over the other.
Acquisitions can be structured as either an asset transaction or an equity transaction.

When an asset transaction is favored, a variety of issues must be considered, as the transaction is in fact the sum of the sales of each of the individual assets and an assumption of agreed upon liabilities.

When the transaction is structured as a share acquisition, by its very nature, the acquisition results in a transfer of ownership of the business entity itself, but the entity continues to hold the same assets and liabilities.

Purchase of assets

In an asset sale, the seller remains the legal owner of the entity, while the buyer purchases individual assets of the company, such as equipment, licenses, goodwill, customer lists and inventory.

The asset sale generally does not include the purchase of the target’s cash, and the seller generally retains its long-term debt obligations. Such a sale is characterized as cashless and debt-free.

Normalized net working capital is typically included in an asset purchase agreement. Net working capital includes items such as accounts receivable, inventory and accounts payable.

Buying assets vs. buying shares: advantages of assets

Here are several benefits of an asset purchase transaction:

• A major tax advantage is that the buyer can “step up” the basis of many assets from their current tax value and obtain tax deductions for depreciation.
• With an asset transaction, goodwill, which is the amount paid for a business over and above the value of its property, plant and equipment, can be amortized on a straight-line basis over several years for tax purposes. In an equity transaction, where the acquirer buys shares in the target, goodwill cannot be deducted until the shares are subsequently sold by the buyer.
• The buyer can dictate what, if any, liabilities it will assume in the transaction. This limits the buyer’s exposure to significant, unknown or undeclared liabilities by the seller.
• The buyer can also choose which assets it will not purchase. If, for example, the buyer determines that the seller has numerous accounts receivable that are likely uncollectible, the buyer can simply choose not to purchase the target’s AR (accounts receivable).
• Because the exposure to unknown liabilities is limited, the buyer generally has to spend less time and money and fewer resources on due diligence.
• Minority shareholders who do not wish to sell their shares may be forced to accept the terms of an asset sale. Unlike a stock purchase, minority shareholders generally do not have to be considered in an asset purchase.
• The buyer can select which employees he wants to keep (and which he doesn’t) without affecting his unemployment rate.

Buying assets vs. buying shares: disadvantages of assets

Here are several disadvantages of an asset purchase versus a stock purchase:

• Contracts – especially with customers and suppliers – may need to be renegotiated and/or renovated by the new owner
• The level of taxes for the seller is usually higher, so the seller may insist on receiving a higher purchase price.
• Attributable contractual rights may be limited.
• It may be necessary to renegotiate labor agreements with key employees.
• The seller still has to liquidate all unpurchased assets, pay all liabilities that have not been assumed and deal with leases that need to be terminated.

Purchase of shares

A stock purchase is simpler in concept than an asset purchase. Therefore, in most cases, it is simply an easier and less complex transaction.

The acquirer buys the target’s stock and takes the target as it finds it, both in terms of assets and liabilities. Most of the contracts that the target has – such as leases and licenses – are automatically transferred to the new owner. For all these reasons, it is often simpler to go with a stock purchase than an asset purchase.

Benefits of a stock purchase

Here are several advantages of buying stocks:

• The buyer does not have to worry about costly revaluations and titles of individual assets.
• Buyers can generally assume non-transferable licenses and permits without having to obtain specific consent.
• Buyers can also avoid paying capital gains taxes.

Disadvantages of a stock purchase

Here are some of the disadvantages of a stock purchase:

• The main disadvantage is that an acquirer does not have a choice of assets and liabilities.
• All assets and liabilities are transferred at their carrying amount.
• The only way to get rid of unwanted liabilities is to create separate agreements in which the target takes them back.
• Applicable securities laws must of course be addressed, which can complicate the process, especially when the target has many shareholders. In addition, some shareholders may not wish to sell their shares, which may delay the process and increase the cost of the acquisition.
• Goodwill is not tax deductible when it exists as a share premium

The choice of the form of an acquisition transaction can have significant tax and other consequences for the business, both for the buyer and the seller. Both parties should explore and consider the benefits and consequences of each type of transaction, with the assistance of professional advisors, to determine whether an asset purchase or share purchase transaction best suits their desires and needs.