Assuming that these advantages [from whatever side you represent] are compelling enough to drive you to buy or sell a business, how do you decide what type of deal structure is best for effectuating the transaction?
Well, acquisitions can take one of two forms: Asset Acquisition or Stock Acquisition. In an asset acquisition the Buyer is purchasing some or all of the target company’s assets/liabilities directly from the company (Seller). The selling company still remains as a shell that is then liquidated/dissolved. In a stock acquisition the Buyer is purchasing the target company’s stock from the company’s selling shareholders.
There are numerous considerations that go into deciding which deal structure is best for you, and sometimes the ultimate decision comes down to whether you are the buyer or the seller.
The following is a brief, high-level breakdown of the Pros and Cons of each option from both the Buyer and the Seller side.
Asset Acquisition (Buyer Side Pros)
– Can pick and chose what assets it wants to purchase
– Can avoid purchasing undesirable liabilities (e.g. lawsuits)
– Step-Up in Tax Basis on assets purchased allows Buyer to realize certain tax benefits (i.e. lower taxable gains on future sale of those assets, reduced present taxes on depreciable and amortizable assets)
Asset Acquisition (Buyer Side Cons)
– Assessing Fair Market Value of Assets being sold can be timely, complex, and expensive
– Transfer of some assets (such as certain contracts) may be difficult or fully prohibited
– All assets purchased, that require a title, must be retitled in the Buyer’s name
– Higher transaction costs due to deal complexity
Asset Acquisition (Seller Side Pros)
– Because of the Buyer Pros, Seller can demand a premium over the Fair Market Value of the prices of the sold assets
Asset Acquisition (Seller Side Cons)
– Assets, except intangible assets, are taxed at a higher rate, ordinary income tax rate (typically between 25% and 39.6% for Federal; plus the applicable state rate) rather than the capital gains rate (Federal is typically 15% although it can vary – in any case it will be cheaper than the ordinary income tax rate; plus the applicable state rate)
– If Seller is a Corporation it will run into the issue of double taxation
Stock Acquisition (Buyer Side Pros)
– Lower Transaction Costs due to reduced complexity
– Buyer can use Seller’s corporate name if it desires
Stock Acquisition (Buyer Side Cons)
– Buyer may acquire unwanted and/or unknown liabilities
– Minority Shareholder of Seller may block or complicate the deal
– Tax-Basis in acquired assets, outside of making certain filings with the IRS, is carried-over rather than stepped-up so there are fewer tax benefits
– Goodwill is not tax-deductible
– All contractual liabilities (i.e. employees, leases, NDA’s) are kept in tact and unable to be changed
– If the deal is financed, the lender may have to consent to the assumption of liabilities
Must adhere to Securities Laws
Stock Acquisition (Seller Side Pros)
– No double taxation AND Reduced Tax Rate – Shareholders are taxed once at the capital gains rate, rather than at the corporate level and then at the ordinary income level
– Usually less complicated if not many Shareholders exist
Stock Acquisition (Seller Side Cons)
– Requires Shareholder Approval
– May require third-party approval (depending on existing contracts)
– Losses ability to retain certain assets
Remember, M&A is very complexed and the finer points of deals can be structured in many different ways. These are some of the high-level pros and cons from each side of the table. There is also the possibility of a “stock sale” being structured as a tax-free reorganization (which is complex but will be the subject of a future post).
As always, when dealing with complex issues, consult the proper professional advisors to help you sift through the many different considerations that come into play.