Limited asset sales might not require the approval of the stockholders of the selling company (though a sale of substantially all assets will still require stockholder approval). The assets transferred might be all of the target company’s assets, or they might be more limited in scope. 1. Whether agreeing to an asset purchase or stock purchase in the sale of a pharmacy, the buyer must perform due diligence. Here are the basic pros and cons of each strategy: Asset Sales. Now let’s take a look at some issues that buyers and sellers need to consider when structuring a business acquisition. A common misapprehension is that buying assets means that the buyer will be able to avoid taking on liability for employees of the business. Having an asset sale also means that the process is quicker for the seller and the seller doesnât have to worry about complicated purchase structures. However, by law, the buyer will become liable for environmental contamination and for union employees in an asset tr⦠An asset purchase involves the purchase of the selling company's assets -- including facilities, vehicles, equipment, and stock or inventory. This post discusses some of the pros and cons of each deal structure. Here are several advantages of an asset purchase transaction: A major tax advantage is that the buyer can âstep upâ the basis of many assets over their current tax values and obtain tax deductions for depreciation and/or amortization. This means that (subject to any agreed price adjustments or indemnifications) the seller gets to walk away from any liabilities and the buyer takes them on. This article highlights some of the considerations and preferences in choosing an asset sale versus a stock sale. A stock purchase involves the purchase of the selling company's stock only. In contrast, a stock sale does not require the approval of the target company’s board of directors, although in most cases it requires the consent of all the shareholders. If the target company has important contracts that aren’t assignable without the consent of the target’s counter-party due to anti-assignment clauses contained in the contracts, an equity sale might be preferable. State corporation laws need to be considered when a business is sold via an asset sale. With a share sale, all of the assets and liabilities of the target company remain with that company. Asset Purchase vs Stock Purchase: Asset Advantages. The buyer may need to renegotiate contracts with customers and vendors. A share sale transaction is simpler for the seller than an asset sale as the company is sold as a âgoing concernâ in totality. A Section 338(h)(10) election is much more common than a Section 338(g) election because the 338(g) election results in two levels of tax, whereas a 338(h)(10) election results in only one. The seller typically pays a higher amount of. What Is Allocation of Purchase Price in Asset Sale? No need to spend hours finding a lawyer, post a job and get custom quotes from experienced lawyers instantly. It's best to consult with an attorney or adviser who has experience with business mergers and acquisitions, as they can assist both buyer and seller through the entire process and make sure they understand every detail. Note that, while the buyer’s legal transaction is with the target’s equity holders in an equity sale, the transaction is with the target itself in an asset sale. In a company sale, it's possible for some shareholders to oppose it. In addition also inheriting any liabilities. Asset Saleâ Advantages No legal liability for the corporation prior to the purchase. In an equity sale all of the assets and liabilities remain with the target company, so if the parties want only some of the target’s assets be transferred to the buyer, then an asset sale will be preferable. Want High Quality, Transparent, and Affordable Legal Services? © 2014 Blue Maven Law, LLC. A disadvantage to the seller of an asset sale is the double taxation that can result if the target is a C corporation. Brian was named by Small Business Monthly in 2014 to its list of 100 St. Louisans to know to succeed in business and was recognized by the newspaper each year from 2015 through 2018 as a top M&A adviser. In an asset purchase , the buyer has control over the liabilities that come along with the company's purchase, and as part of the purchase agreement, they can refuse to assume liability for undisclosed or unknown debts. When selling these types of businesses, the buyer purchases the entire ownership interest. Buyers also receive a ârestartâ of depreciation and amortization ⦠2.Sale Processâ The business continues as a going c⦠The buyer of the stock sale continues to do business with the same ⦠The result is that the entire target company, including its assets and liabilities, is now held by the buyer, with the target company remaining intact. Asset sales are common on companies that are experiencing financial distress or have gone completely bankrupt. Buyers may not legally be allowed to avoid certain business liabilities. In California, when an escrow is utilized, a bulk-sales process assures that the buyer will get title to the assets free and clear of all liens and encumbrances. The selling equity holders are left holding the cash. ... Stock Sale â Advantages. If the business has equipment that the owner has fully depreciated for their own tax purposes, the new purchase allows the buyer to step up the value of the equipment and begin the process of depreciation anew. Outcomeâ A share sale results in a clean break for the seller: the buyer purchases the whole company, including all liabilities (unless expressly agreed otherwise). Unlike exchange-based tax-deferment methods, Deferred Sales Trusts are an instance of a special kind of sale, called an âinstallment saleâ, which can be used to defer capital gains taxes by breaking up payments on the sale over multiple installments.Unlike ⦠Because the target’s contracts remain intact in an equity sale, they generally are not assigned and thus consent isn’t required. An asset sale allows the buyer to cherry pick which assets it will purchase and which liabilities it will assume. ⢠An asset sale can be used to sell any business, whereas a share sale can only be used to sell an incorporated business. When comparing asset sales to share sales, it's important to consider the pros and cons of each option: An asset sale can be used to sell any type of business; a share sale can only be used to sell an incorporated business. 2020-10-20 17:57:00. The ownership of the target’s corporate or limited liability company shell does not change hands. A sole proprietorship, partnership, or LLC does not issue stock. the pros and cons of âAsset purchase/ sale vs. Share purchase/sale.â Pros and cons of assets vs. shares A quick guide to success when buying or selling a pharmacy BUYING A PHARMACY Asset purchase: Share purchase: PROS ⢠This company is yours to begin from scratch! You would start the depreciation over that gives us some flexibility or some creativity that we work with. they may wish to retain certain assets such as their cars or items of equipment). ⢠If you choose an asset sale you are more in control of what youâre selling and are able to keep certain assets (such as the business name etc.). When Microsoft acquired LinkedIn on June 13, 2016, what Microsoft was acquiring with its cash was LinkedIn stock. It can be a great opportunity to snag a deal on ⦠In addition, the buyer’s tax basis in the assets is equal to the purchase price of the assets. Your email address will not be published. The decision about whether an asset purchase or stock sale is best for your individual situation is complex and often difficult. At Beacon Advisors, we help you weigh your options Below we have outlined the major differences between the two as well as some of the pros and cons of each. There are several pros and cons of each choice. This can include equipment, inventory, lease agreements, licenses and trade secrets. However, the buyer will expect extensive warranties and indemnities in the sale contract to mitigate its increased exposure to risk and this can often lead to protracted negotiations. In a share sale, however, the entire business, including the name is passed on to the new owners. In an asset sale, they have no choice and must sell, depending on the terms of the agreement. Real estate investors have the ability to gain leverage on their capital and take advantage of substantial tax benefits. This means the buyer is at risk from future litigation from liabilities that are not paid and cleared. For example, since accounts receivable is an asset, the buyer can decline to include it in the sale price if they feel it is of no value due to unsuccessful collection attempts. The transfer of certain assets, such as intellectual property, may require a filing with the state or federal government, or associated agency. Asset sales can be advantageous for sellers in that they can stipulate the assets they wish to sell and retain ownership of those they do not (i.e. However, every business transaction is unique. With a stock sale, this is not possible because the equipment has already been fully depreciated. Your email address will not be published. The parties should use caution, however, because some contracts define “assignment” to include a change of control, which would be triggered in the event of an equity sale. A disadvantage to the seller of an asset sale is the double taxation that can result if the target is a C corporation. Per the proxy, at deal closing, each LinkedIn shareholder was set ⦠If the company has more liabilities than any good valuable assets, then it is better to go for a stock acquisition rather than going for an asset ⦠The purchase price of a business can depend on whether or not the sale is a stock or asset sale. The short answer is that a stock sale is better for you, the seller, while the buyer benefits from an asset sale. Both approaches conceptually get you to the same place, but certain legal, tax and accounting issues make this decision important. The new owner can also decide which employees to retain and which to terminate, taking advantage of the fact that terminating employees does not affect their unemployment rate. Will they be purchasing all of the assets outright, or purchasing all of the stock shares issued by the company? We know this because the announcement press release, merger agreement and merger proxyall describe how Microsoft is buying Linkedin shares. Not all types of business are eligible for a stock sale. Assets and liabilities not desired by the buyer will be distributed or paid off prior to the sale. Some of the disadvantages of an asset purchase include: In a stock sale, a company's shareholder sells their existing stock to a new owner. Liability. It is therefore a question of fact whether the sale is of t⦠Hire the top business lawyers and save up to 60% on legal fees. Unlike an asset sale, stock sales do not require numerous separate conveyances of each individual asset because the title of each asset lies within the corporation. Do the parties want all of the target’s assets and liabilities to be transferred to the business buyer? Required fields are marked *. Share it with your network! There are some situations some situations in which a stock sale makes more sense than an asset purchase. This note provides an overview of the key differences between a share purchase and an asset purchase transaction, and sets out some of the main advantages and disadvantages of structuring a corporate transaction as a share sale or an asset sale. This advantage is off-set to some extent, however, in states like New York that do not have a “casual and isolated sales” exception and thus impose sales taxes on certain types of assets in the business acquisition context. Which structure is right for you depends on your circumstances. Buyers also have control over the assets included in the sale. Often in larger stock sales, there is a requirement for seller financing, loans, stock options, and complicated tax implications. In an equity sale, the buyer purchases the equity from the owner or owners of the target company — stock in the case of a corporation and membership interests in the case of a limited liability company. The sale of all or substantially all of a corporation’s assets generally requires the approval of the corporation’s board of directors and shareholders. In an asset sale the target company’s assets, and sometimes its liabilities, are transferred to the buyer. The benefits of an asset sales are not just for the buyer. ... As with an asset purchase, the stock purchase agreement will need to include an indemnification section and a noncompete. Pros and Cons: Real Estate . Selling Your Company: Merger vs. Stock Sale vs. Asset Sale Blog Cooley Go. Cooley LLP USA January 26 2017 ... and understanding the pros and cons of your alternatives is important. Purchasing a company's assets offers tax advantages for the buyer. This is known as âstepped-up cost basis,â which will be of great value to them when they go to sell the asset. Image via Shutterstock. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb. UpCounsel accepts only the top 5 percent of lawyers to its site. In the most common type of merger (a âreverse triangular mergerâ), the buyer will create a new wholly-owned subsidiary company (often called a âmerger subâ) that will merge directly into your company, with the merger sub disappearing as a distinct legal entity following the completion of the merger. The actual assets and liabilities acquired in a stock sale tend to be similar to that of an assets sale. The buyer may need to rewrite employment agreements and contracts. In general, buyers prefer asset sales and sellers prefer equity sales. There is no change in the status of the target entity itself, and its contracts, assets, and liabilities remain with the entity. In this transaction, the buyer obtains all company equity including all assets and liabilities. Most buyers prefer asset deals due to the tax advantages they can secure. Only C corporations and S corporations need to make the choice about selling assets vs. stock. This may well not be the case as employees of the seller business will be subject to TUPE legislation (this is employment legislation) which has the effect of transferring employeesâ rights and obligations to a buyer where âthe whole or substantially the wholeâ business is sold. As illustrated below, in the equity sale, the target’s equity holders sell their equity directly to the buyer in exchange for the buyer’s consideration, which in the illustrations below is cash. In a stock sale, the goodwill amount isn't tax deductible until the buyer sells the stock to someone else. The sale proceeds are taxed again when they are distributed to the shareholders in the form of a dividend. ... 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