There are two possible ways to purchase a business; one way is through the acquisition of the company’s assets and the other is effected by buying the company’s shares or capital stock.
Asset acquisitions occur when the buyer purchases all of the company’s tangible and intangible assets from the seller. Tangible assets usually include everything from the company’s accounts receivable, inventory, furniture and fixtures, customer lists, logos, etc. Intangible assets would include things like proprietary technology and know-how, etc. In certain situations, buyers may also assume certain liabilities of the company to be acquired. In yet other circumstances, the acquirer may buy only selected assets.
A stock transaction occurs when the buyer simply purchases the capital stock or shares of the company for sale; in effect, eliminating the transfer of title of all the assets within the company. In this type of transaction, the buyer also “acquires” all of the debts and liabilities of the company.
Tax considerations are often times one of the major determinants in deciding which type of sale is used. When an asset acquisition takes place, the buyer steps-up the tax basis of the assets acquired, which results in increased depreciation and lower taxable income in future periods. In an asset acquisition there may be higher taxes for the seller because the company will have pay tax on the gain from the sale of the assets. The shareholders may also have to pay taxes on their individual gains when funds are distributed from the company. Usually, a good tax advisor can help the selling company and the shareholders to mitigate the taxes related to an asset transaction. Sometimes, these tax considerations complicate the negotiations, but a good M&A advisor should be able develop a fair way to resolve the issue(s).
From a liability standpoint, the acquisition of the company’s capital stock or shares increases the risk for the buyer because all actual or potential liabilities with regard to the selling company are acquired with the capital stock. Consequently, the due diligence process is often times more meticulous in a stock purchase due to these assumed liabilities and the enhanced risk of the transaction. This risk to the buyer can be mitigated by transferring liability back to the seller in the purchase agreement via representations and warranties. The buyer may also require a larger escrow and a longer time period if there are real or perceived risks related to undisclosed or even unknown liabilities.