Buyers versus Sellers

In a recent post I outlined the features of the two main types of business acquisitions, stock and asset deals.  To recap briefly, in a stock acquisition, the buyer purchases the stock of the company being acquired. In doing so the buyer takes over not only the target’s assets, but all of its liabilities, such as lawsuits, tax liens, and other claims, even those that haven’t been made known yet.  On the other hand, in an asset deal the buyer can pick and choose what assets and liabilities it wants to acquire, and can exclude those liabilities that it does not want.

From this short recap, it seems that buyers will prefer asset deals, and sellers prefer stock deals.  That is generally so, but let’s talk about some of the other reasons one party might prefer a particular deal structure.

Buyers will prefer asset deals not just because they can pick and choose what to buy, but also because asset purchases give them the following benefits:

• The buyer can allocate the purchase price across the assets at their fair market value, which gives the buyer a stepped-up cost basis in the assets. This will lower any capital gains treatment if the buyer sells those assets in the future
• If the seller’s company has minority shareholders, in an asset acquisition the buyer can essentially leave them behind as the selling company will still exist after the sale
• Buyers can amortize the goodwill and other intangible assets of the acquired business over a fifteen-year period
• The buyer does not inherit the selling company’s collective bargaining agreement, or retirement and other employee benefit plans

However, there are some disadvantages to the buyer in an asset deal:

• It may be difficult to take over key contracts, if the other party to those contracts does not consent to the seller’s assigning them to the buyer
• Insurance, worker’s compensation, and unemployment rates may be higher than if the transaction was a stock deal
• If the selling company had net operating losses (NOLs), the buyer does not get these in an asset deal, and loses the tax benefit that goes along with NOLs
• Asset deals are usually more complex, as the parties must agree on the value of the assets

Sellers generally dislike asset deal, for the following reasons:

• They retain all of the liabilities of the business, including those that are unknown
• The seller usually bears to burden of obtaining required consents to assign contracts, intellectual property, and other intangible assets, which can be a time-consuming process
• The selling company will recognize a taxable gain on the sale of its assets. If the selling company is a C-corporation, there will be a double level of taxation, first at the corporate level due to the sale, and later to the shareholders when the company dividends its after-tax sale proceeds
• If the selling company’s cost basis in its assets is low, the tax impact will be greater
• The transaction is complicated because transfer of all of the assets must be documented correctly

As you can see, each party has differing interests.  Selecting the right structure for a transaction will affect how smoothly the transaction process moves, and can even affect the success of the acquired business.  In the next post we will discuss the reasons sellers prefer stock deals, and why buyers do not.