Asset Purchase vs Stock Purchase
Under an asset purchase, the buyer purchases all or a portion of a business’s assets and liabilities from the seller. These assets include both tangible and intangible assets such as real estate, equipment, supplies, inventory, accounts payable, and customer databases. The seller retains the legal entity through this type of deal but no longer retains control of the equipment, licenses, trade names, or inventory. Asset purchases generally do not include purchasing the target’s cash and the seller is typically responsible for its debt obligations.
A stock purchase is when the buyer buys the stock of the business from the company’s shareholders. Unlike an asset purchase, in a stock purchase, the buyer obtains the seller’s legal entity.
Advantages and Disadvantages of an Asset Purchase
From a buyer’s perspective, asset purchases allow the buyer to “step-up” the depreciable basis of the assets. By allocating a higher value for quickly depreciating assets and assigning lower values to slower depreciating assets, the buyer can gain additional tax benefits. Doing this will help to improve the company’s cash flow during the first few years. Another advantage for buyers is that it is easier to avoid inheriting potential liabilities that the seller had.
From a seller’s perspective, asset purchases typically generate higher taxes because you can be taxed at capital gains rates and potentially higher personal income tax rates on other assets. If the entity being sold is a C-corporation, the seller now faces double taxation as well.
From a buyer’s perspective, some assets are more difficult to transfer in an asset purchase. Items like contracts, permits, leases, and even some intellectual property can require additional steps to transfer slowing down the sale.
Advantages and Disadvantages of a Stock Purchase
From a seller’s perspective, stock purchases are typically preferred because all proceeds are taxed at the lower capital gains tax rate. Sellers are also less responsible for future liabilities, like contract claims, employee lawsuits, and benefit plans.
From a buyer’s perspective, stock purchases also have certain advantages. Buyers can assume licenses that are non-assignable and permits without needing to obtain specific consent.
From a buyer’s perspective, they lose the ability to gain a stepped-up basis in assets and can’t depreciate certain assets. Buyers also accept more risk in a stock purchase. Some risks include future lawsuits, employee issues, and other liabilities.
For more information regarding either an asset purchase or stock purchase please contact the professionals at The Center for Financial, Legal, and Tax Planning, Inc., at (618) 997-3436 for more information.