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Stock vs. Asset Deals

An M&A transaction is typically structured one of two ways: the sale and purchase of the company’s assets, or the sale and purchase of the company’s stock.

What’s the Difference?

Asset Sale / Purchase

The seller agrees to sell specific assets and liabilities, typically the current assets and liabilities, excluding cash and debt. This means the buyer only takes on the risks of those specific assets and the seller retains anything not included in the transaction, such as cash. Normalized net working capital is typically included in an asset purchase agreement.

Stock Sale / Purchase

In a stock sale, the seller sells the entire company, including all assets and liabilities. Most contracts, such as leases and permits, transfer automatically to the new owner.

 

Advantages of an Asset Transaction

  • Tax advantages – buyer can “step up” the basis of many assets over their current tax values and obtain tax deductions for depreciation and amortization
  • Flexibility – sellers can retain their cash; buyers can carve out liabilities they don’t want to assume
  • Lighter Due Diligence – because the exposure to known liabilities is limited, the buyer typically spends less time, money and resources on due diligence

Disadvantages of an Asset Transaction

  • Complexity – specific assets and liabilities must be completely reassigned, contracts might have to be renegotiated, net working capital calculations are more complex
  • Purchase Price – the tax cost to the seller is typically higher, so the seller may insist on receiving a higher purchase price
  • Closing Risk – the seller or buyer might walk away from the transaction given the added complexities and nuances in an asset sale
  • Post-Close Concerns – seller must plan how to liquidate any assets that aren’t purchased, as well as wind down the leftover entity

 

Advantages of a Stock Transaction

  • Simplicity – stock deals are straightforward, the entity is sold and purchased in its entirety
    • Sellers can rid themselves of future liabilities, issues with contracts, etc. because they’re selling everything to the buyer
    • Buyers can avoid paying transfer taxes and can assume non-assignable licenses and permits without obtaining specific consent

Disadvantages of a Stock Transaction

  • Fewer Tax Advantages – no opportunity for asset step-up for the buyer
    • All assets and liabilities transfer at carrying value
    • Note: Section 338(h)(10) election is available in limited situations, which allows, for tax purposes only, the buyer to be treated as acquiring the target’s assets, rather than stock
  • Full Acquisition – buyers assume ownership of all unwanted assets and liabilities, sellers give up ownership to all wanted assets and liabilities
  • Legal Complexity – securities laws must be dealt with, which can complicate the process
    • Some shareholders may not wish to sell their stocks, which can drag out the process and increase the cost of acquisition

 

Work with Trusted Advisors

Different types of transactions, entity structures and counterparties can pose challenges, which is why upfront planning matters. Whether you’re on the sell side or buy side, it always makes sense to seek assistance from trusted advisors, tax experts and legal counsel far in advance of a transaction. Your advisors can help you understand how to structure your organization in order to identify the counterparty universe, minimize tax implications and maximize your proceeds.

 

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