M&A – 4 Advantages of Asset Purchase
We enjoy watching our clients grow and achieve their goals. Mergers and acquisitions (“M&A”) are a part of the natural evolutionary cycle for many businesses. Our clients generally fall into one of the following three categories with regard to M&A activity: (1) succession planning, (2) strategic growth, and/or (3) management buyout.
We will explore different M&A topics in other posts, but for now we will focus on a basic question we hear often: what is the difference between an asset purchase and a stock purchase? In an asset purchase, the buyer purchases specific assets of the business, such as equipment, inventory, and intellectual property. Although subject to negotiation, the buyer typically does not take on any liabilities. In a stock purchase, the buyer purchases an entire company, including all assets and all liabilities. Here are 4 advantages of an asset purchase, from a buyer’s perspective:
The buyer will have a “stepped up” basis in the purchased assets over their current tax values and obtain ordinary tax deductions for depreciation and/or amortization. The seller, on the other hand, is likely going to be forced to recognize and pay tax on the gains.
The buyer can dictate the assets it is purchasing, and liabilities, if any, it is willing to assume.
Unlike in a stock sale, minority shareholders who do not want to sell their shares can, effectively, be forced to accept the terms of an asset sale. Even though they can be outvoted, minority shareholders must be taken into account and do get a vote in most stock sale scenarios.
Because the exposure to unknown liabilities is limited, the buyer typically needs to expend less time and money, and fewer resources, on conducting due diligence.
If you have any questions about purchases, sales, or any M&A topics, please contact us.
Joseph E. Fournier is an Attorney and a CPA who has more than twenty years of experience in a variety of business legal matters, including start-ups and company formations, drafting shareholder and operating agreements, contracts, employment law, commercial litigation, tax planning and audit defense, and mergers and acquisitions (M&A). He also handles estate planning matters, such as business succession planning, wills, trusts, and probate.