Asset Purchase vs. Stock Purchase: How to Make the Right Choice

learn more about the difference between an asset purchase vs. stock purchase

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.

By Al Melchiorre

Al founded MelCap Partners in 2000, and is responsible for managing all aspects of client engagements from proposal through closing, developing business, reviewing offering memorandums and financial models, negotiating purchase agreements, and interacting with buyers and investors.