Whether you’re considering pursuing a merger or acquisition for your North Carolina business, in researching whether one of these options is best for you, you’re bound to have encountered the concepts of “stock purchase” and “asset purchase.” If you’re wondering how these differ, continue reading, where we’ll describe some of the differences between them.
What a Stock Purchase Is
In a stock purchase, the buyer purchases shares of stock or other equity interests in the target company directly from the owners. The buyer becomes the new owner of the target business.
Advantages and Disadvantages Associated With Stock Purchases
Whether a particular factor associated with a stock sale is positive or negative will vary depending on one’s role in the transaction. However, some commonly cited advantages associated with stock purchases from a selling business owner’s perspective include:
- The transfer of stocks involves less complexity than transferring assets.
- The tax consequences to sellers are generally more advantageous than in an asset purchase.
- The name, the organizational structure, contracts, etc. remain the same once the stock purchase occurs unless otherwise stated in the acquisition agreement.
- It is less likely to violate anti-assignment clauses in contracts, given that the company continues to exist in the same form after the sale is closed.
At the same time, there are some factors that, depending on one’s perspective, may be seen as disadvantageous to those considering a stock purchase, such as:
- Stock purchases are disfavored by risk-averse buyers as they will assume additional risk in acquiring pre-existing liabilities and contingencies, whether known or unknown.
- Getting in touch with a large number of stockholders and coordinating a sale among them can be challenging, if not a deal-breaker, to a buyer looking to acquire 100% equity.
- There isn’t a step-up for tax purposes when acquiring assets, with limited exceptions (such as if an S-corp has 336(e) or 338(h)(10) elections).
- A buyer may find their tax obligation is higher in the future because there is lower depreciation expense.
What an Asset Purchase Is
In an asset purchase, a buyer purchased all or substantially all of a target company’s assets, or those of a business division. Asset purchases generally involve buyers taking on only specified pre-existing liabilities of the target company.
Benefits and Downsides to Asset Purchase Sales
Pros and cons of asset purchases vary depending on one’s point of view as a buyer or seller. Some benefits associated with asset purchases include:
- Buyers can purchase assets they want, leaving known and potential liabilities and any undesired assets in the seller’s possession.
- The assets acquired by the buyer are received on a step-up basis, which offers significant tax benefits for them (and generally less favorable tax consequences to sellers).
- The buyer deals with the company’s management more so than shareholders.
Conversely, some commonly cited downsides of asset purchases include:
- Separate negotiations may need to occur regarding the purchase of certain assets.
- Separating assets can be costly and time-consuming measures, such as the negotiation of a transition services agreement between buyer and seller, may be required.
- The transfer of assets from seller to buyer can be complicated.
- It may be necessary to procure third-party consents to move forward with the sale of assets.
- Sellers may incur more tax as noted above.
- Deciding what to do with a selling company’s remaining assets or liabilities is necessary if all are not purchased/assumed by the buyer.
Getting Legal Guidance in Planning for a Merger or Acquisition
Above is only a brief introduction to what stock and asset sales are and some of the pros and cons associated with each option. Reach out to our law office, Wilson Ratledge, and we will put you in contact with an experienced attorney who has guided other companies here in Raleigh and elsewhere in NC in growing their business’ reach through strategic acquisitions.