– Stock/equity purchase and asset purchase are the two most common ways to structure the purchase of a business.
– There may be circumstances that result in a hybrid between these two structures or other structures such as a merger.
– The structure of the deal is critically important to both the buyer and the seller as there are tax, legal, regulatory, administrative, and post-close integration considerations for each structure type.
– Companies planning an acquisition should seek advice from skilled legal and financial advisory professionals to ensure the most advantageous approach is selected and to chart a path for a successful business combination. – Stock purchase involves acquiring all of the target company’s equity from its shareholders, making the buyer the owner of all assets and liabilities.
– Advantages for buyers: Faster and simpler transfer of ownership, potential tax benefits.
– Disadvantages for buyers: Potential for hidden liabilities, less flexibility in allocating purchase price.
– Advantages for sellers: Greater potential for tax benefits.
– Disadvantages for sellers: Risk of being liable for unknown future liabilities. 1. Stock purchases are advantageous for sellers due to favorable tax treatment and reduced exposure to unknown liabilities from the company’s prior business.
2. Sellers prefer stock purchases because they do not need to wind down the business after the transaction or deal with assets and liabilities left behind in an asset purchase.
3. Stock purchases result in lower capital gains tax for the seller and bypass corporate level taxes in C-Corporations.
4. Buyers may be hesitant to do a stock purchase due to fear of unknown liabilities associated with the target business.
5. Stock purchases are considered simpler transactions as only the equity changes hands, and the direct ownership of each asset does not have to be transferred at the closing of the purchase.
6. Stock purchases may be more advantageous from a business perspective if the acquired company provides a different service or product from the buyer’s own business. – In an asset purchase, the seller keeps the legal entity of the company and transfers specific assets and liabilities to the buyer.
– Assets can include physical items like equipment and inventory, as well as intangible assets like customer lists and intellectual property.
– Buyers generally prefer asset purchases over stock purchases because they can choose which assets and liabilities to take on. – Buyers can allocate a higher value for assets that depreciate quickly and a lower value for assets that depreciate slowly to gain tax advantages.
– Buyers get a step up in basis in the purchased assets, which can have favorable tax implications.
– Sellers may face higher taxation during an asset purchase, especially with “hard” assets being subject to higher ordinary income tax rates.
– Shareholders of C-Corporations are subject to double taxation in connection with asset purchases.
– The selling entity could be left with the unwanted assets and liabilities of the company after the transaction is completed, creating additional complexity for the seller.
– An asset purchase can be an ideal approach for expanding existing services, allowing for the evaluation and consolidation of duplicative systems and processes. – Payroll should not be interrupted after the acquisition, and the deal structure will determine how employees are paid.
– In an asset purchase, each employee needs to be rehired by the new entity, potentially leading to compliance issues and time-consuming processes.
– If the target company has employees on H1-B visa status, there may be additional complications and costs for sponsorship application. – Buyers are very concerned with ensuring that cash flow is not interrupted by an acquisition.
– In a stock purchase, existing processes can usually be left in place to avoid changing payment entities and bank accounts.
– Buyers may need to notify certain customers, vendors, or other parties of a change in ownership.
– In an asset purchase, buyers must immediately communicate changes to customers and provide new entity information.
– All contracts must be reviewed to determine if assignment is authorized or if additional steps are required.
– The review and renegotiation process for many customers and clients can be time-consuming.
– There is a possibility of lost revenue if previous clients or customers do not wish to work with the new entity.
– A stock purchase is preferred for the continuity of business operations, as ownership and management teams remain intact. – Buyers may prefer an asset purchase to have more control over the assets they acquire and to streamline operations for increased efficiency and profitability.
– Contracts with technology vendors and service providers may need to be renegotiated during an asset purchase, adding time, expense, and complexity to the transaction.
– Intellectual property rights are crucial to understand in cases where a company’s solutions rely on software and technologies for ongoing success.
– Disparate systems covering the same services can result in process and system inefficiencies, which should be a priority for a buyer to review and address. – In a stock purchase, day-to-day finance and accounting activities can continue with little to no change.
– In an asset purchase, the new acquiring entity may lack a credit history needed to re-establish credit accounts with vendors and setting up direct deposits with payroll providers.
– Vendor agreements may need to be established with the new acquisition entity. – Trenam and Vector Advisory support clients through a transaction by working with buyers and sellers to shape various documents and agreements.
– Vector Advisory offers pre-close deal management, data room management, integration planning, post-close integration planning, post-close accounting deliverables, and tailored integration planning.
– Understanding the key considerations across the entirety of an organization will improve the likelihood of a successful transaction. – Shelby Faubion has over 25 years of experience in corporate finance and accounting with expertise in M&A advisory services and CFO advisory services.
– Vector Advisory is a partner for private equity firms, family offices, and their portfolio companies, providing leadership for successful merger and acquisition integration and office of the CFO solutions.
– Thomas Cockriel is a shareholder in Trenam’s Business Transactions practice group, specializing in corporate and business transactions, intellectual property and technology agreements, and providing strategic advice on technology transactions across various industries. – Trenam Law’s corporate attorneys represent public and private enterprises in mergers and acquisitions.
– They work with financial institutions, private equity and investment funds, and portfolio companies.
– The firm provides support in areas such as employment, real estate, litigation, and tax structuring during transactions.
Leave a Reply