Mergers and acquisitions can be accomplished in a number of different ways. The ultimate goal of the transaction is to marry the business and economic synergies of two or more companies into a better more competitive company. An acquiring company will look to either purchase existing assets of a company or the company’s common stock. Depending on which method is used to structure the transaction, the effect of a stock purchase versus an asset acquisition are monumental and will have varying effects on the buyer and seller. This article will focus on the benefits and pitfalls of structuring a transaction as an asset purchase.
The acquisition of a company can be executed in two ways. The buyer can purchase the individual assets or the ownership interest of the company. The ownership interest is the common stock of the company if the company is a corporation. Asset purchases are usually desirable to buyers of companies, while sellers of companies generally prefer the sale of their common stock interest in the company.
An asset purchase can also be complex in nature. In an asset purchase, the buyer is purchasing individual tangible assets of the company and in some cases intangible assets such as goodwill, competition covenants, patents, etc. Additionally, some of the target company liabilities will be assumed by the buyer on specific assets. Careful planning and due diligence should be performed in cases where there are potential environmental liabilities, where regulatory authorities may be able to pursue damages against a new owner forcing the new owner to seek relief from damages against the seller. Other potential issues which require planning and due diligence include product liability, union contracts, bulk sales statutes and bankruptcy statutes regarding conveyance of property.
Buyer's Perspective - Asset Purchase
The purchase of a company's assets is preferable to a buyer because the buyer is insulated from any known or unknown liabilities of the acquired business. The buyer inherits only liabilities such as loans that encumber certain assets such as equipment or real estate. Generally, loans, lease agreements and other related contracts have to be renegotiated because they are not automatically transferable to the buyer. Favorable tax consequences exist for the buyer depending on the classes of assets that are being purchased.
The benefits of an asset purchase to the buyer include:
- The buyer only wishes to purchase certain assets of the company.
- The buyer wishes to avoid the purchase of certain assets of the company.
- The buyer wishes to terminate unfavorable collective bargaining agreements.
- The buyer wishes to avoid costly under funded employee benefit plans.
- Sufficient financing is not available to purchase the entire company.
- The buyer seeks to avoid potential unknown liabilities.
- The buyer seeks to avoid the assumption of current liabilities.
- The buyer seeks favorable tax treatment of the acquisition.
The problems with an asset purchase to the buyer include:
- The triggering of unfavorable tax consequences to the seller.
- The buyer may not be able to avoid certain liabilities.
- Certain key intangible assets may not be assignable.
- An asset purchase deal may trigger the maturity of debt.
- Fraudulent conveyance risk.
- Compliance with bulk sales statutes.
- The cost and time delays to complete the transaction.
In most cases, the buyer will prefer an asset purchase because of the basis step-up which produces favorable tax treatment, the avoidance of known and unknown liabilities, and avoiding the purchase or assumption of non-desirable assets.
Seller's Perspective - Asset Purchase
In most cases, the seller of a company would prefer the sale of the ownership interest (common stock if a corporation) as opposed to an asset sale because the seller is generally stuck with unfavorable tax consequences and may be saddled with certain undesirable assets and liabilities. However, there are instances where good tax planning can produce opportunities for a seller to favor an asset purchase.
The benefits of an asset purchase to the seller include:
- The company being sold is considered an asset for tax purposes; the asset sale could produce the same results as a stock sale.
- Current tax attributes existing in the company such as net operating losses and capital loss carry forwards may help alleviate the corporate level gains from an asset sale.
- Depending on the current tax basis of individual assets versus the stock basis of the individual stockholders, the tax consequences might be favorable.
- Proceeds from the sale of the assets will be reinvested into new business ventures eliminating tax at the liquidation level.
Careful planning by the M&A professional in conjunction with the legal and accounting professionals can lead to the development of an asset deal that will serve both parties interests, thus, getting this type of deal to closing.
Jeffrey J. Presogna, CPA CVA, and Vercor partner consults on the purchase and sale of mid-size private companies. Jeff can be reached at Jeff@vercoradvisor.com
