The Advantages of an Asset Purchase . Firefox, or The Ascent is The Motley Fool's new personal finance brand devoted to helping you live a richer life. As you can tell, there are many complex questions to answer about the sale of a business before solid tax advice can be issued. 500 W. Cummings Park, #5650 If there are pieces of the business they don’t want (certain customer accounts, for example), these can simply be carved out in the purchase agreement. See you at the top! Privacy Policy | Accessibility. We use cookies and other tracking technologies to analyze our website traffic. So how many deals are asset sales vs stock sales? This will help you understand how to plan ahead and structure your organization in order to seek out the kind of buyer you need and minimize the tax implications in order to truly maximize your proceeds. Sellers often favor stock sales because all the proceeds are taxed at a lower capital gains rate, and in C-corporations the corporate level taxes are bypassed. , as well as talk with tax and legal experts far in advance of a sale. The buyer gets a corresponding tax benefit in the form of a stepped-up tax basis for the assets purchased, allowing the buyer to take larger amounts of depreciation allowances in the future than would otherwise be possible. Also, if a company is dependent on a few large vendors or customers, a stock sale may reduce the risk of losing these contracts. You may also have a look at the following articles to learn more. When an investor is looking to buy any business or an owner is looking to sell a business there are primarily two ways of doing it, the transaction can be done as purchase and sale of the company’s stock or purchase and sale of the company’s asset. Businesses can also seek professional advisors like investment bankers or valuations experts who have many options for companies looking for inorganic growth in their industry or even looking to enter into a new industry altogether. Once complete, the target company can continue to exist as a distinct legal entity even though it often becomes a corporate subsidiary of the acquiring company. Mergers and acquisitions are an important way that growing companies get bigger, and structuring a deal in the best interests of both the acquirer and the target is critical to getting a transaction done. Asset purchases are useful when an acquirer only wants to buy part of the target's overall business, but they're also used to shield the acquirer from taking on any potential liabilities of the target company. Among the many issues that need to be considered are the following: In general, buyers prefer asset sales, whereas sellers prefer stock sales. The merger and acquisition market is strong, and some experts don’t see a slowdown anytime soon. However, the new parent company can be vulnerable to existing or even unforeseen liabilities of the target company in a stock purchase. Federal capital gains rates are approximately currently 20%. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. As a result, the lower depreciation expense can result in higher future taxes for the buyer, as compared to an asset sale. If the seller of the company wishes to liquidate the entire entity and all the liabilities and contracts then stock acquisition is the best option. This is not required in a stock transaction. A corporation can make an election to treat a qualifying stock purchase as an asset purchase for federal income tax purposes. In an asset acquisition, the buyer is able to specify the liabilities it is willing to assume, while leaving other liabilities behind. If the business in question has a significant number of copyrights or patents or if it has significant government or corporate contracts that are difficult to assign, a stock sale may be the better option because the corporation, not the owner, retains ownership. The buyer can select under the asset method which employee they need to retain without impacting their unemployment rates. Asset Purchase advantages over stock purchase include tax advantage, flexibility on choosing assets and employees, less risk and due diligence, less role of minority shareholders. Salem, NH 03079, (781) 569-4700 In an asset purchase, the buyer is able to specify the liabilities it is willing to assume while leaving behind the other liabilities. Moreover, if selling shareholders receive stock of the acquirer in exchange for their shares of the target, then the shareholders can often avoid capital gains tax in a stock purchase. When deciding between an asset purchase vs. a stock purchase, it’s essential to weigh the pros and cons in terms of price, the complexities of getting the deal done, and the tax implications. For the seller, though, a stock purchase avoids a taxable event to the target corporation, and selling shareholders get favorable capital gains tax treatment on the cash proceeds they receive in the sale. This means that nothing has to be retitled. Buyers lose many of the tax benefits that they can claim in an asset purchase.   (781) 933-3777 Here we also discuss the Asset Purchase vs Stock Purchase key differences with infographics, and comparison table. On one hand, buyers may offer a higher price on asset purchases. “Complicated” is an understatement when it comes to understanding the numerous economic decisions that a business owner needs to contemplate before deciding on any specific deal structure. We recommend using Please contact us to discuss the specific issues about selling or buying a business. Once an asset purchase is complete, the assets and liabilities that have been purchased are moved to the new entity and the old entity (and any assets or liabilities it still owns) must be wound down. However, the purchase agreement in a transaction can shift responsibilities back to a seller. For example, if the entity they’re selling is a C corporation, it will be taxed when it sells the assets and then the owner will be taxed when transferring those proceeds out of the corporation. The email address cannot be subscribed. ALL RIGHTS RESERVED. There’s also the potential for challenges with minority stockholders or shareholders who may not have to sell. For one, the seller has to plan for how to liquidate any assets that aren’t purchased, as well as wind down the leftover entity after the deal is complete. Obtaining consents and refiling permit applications can slow down the transaction process.