The Biz Blog
February 19, 2019 by Alex Estrin
There are three principal ways to acquire a business: a purchase of the target's assets or stock, or a merger. Alex Prasad, business attorney with AEGIS Law, and Alex Estrin business broker with BizEx, present a high-level summary of asset purchases.
Asset Purchase
In an asset purchase, a Buyer acquires only those assets and liabilities specifically delineated in the purchase agreement. This surgical approach ensures that a Buyer gets only what it wants – and nothing more. As compared to a stock purchase, the process of picking and choosing usually leads to a longer deal timeline. In other ways, an asset purchase can be simpler; for instance working capital adjustments are not always included in an asset purchase as the Buyer may not be acquiring the bank accounts of the Seller.
An asset purchase can also be simpler than a stock purchase depending on the number of stockholders of the target. Usually, the governing documents of the target will specify a special vote of the stockholders if the target is considering a sale of "substantially all of the assets" of the company. Once this threshold is cleared, the target may enter into the transaction. In contrast, depending on whether the governing documents of the target include a drag-along clause, the target may need to reach unanimity to entering into a stock purchase if the Buyer insists on acquiring 100% of the issued and outstanding stock of the target. Buyer's almost always insist on such an acquisition as they do not want to deal with minority stockholders they are unfamiliar with going forward.
Buyers generally favor an asset purchase as they will receive a stepped up basis in the assets they acquire, which can be depreciated to its tax benefit over time. Under some IRS rules, and with post-closing coordination between the parties, Buyers can treat an acquisition as an asset purchase and Sellers can treat it as a stock purchase (which sometimes results in a more favorable tax treatment for the Seller). “In my experience, most businesses under $5m tend to be asset purchases,” says Alex Estrin. If you’re selling an owner-operated business, you’re most likely going to be in an asset purchase transaction.
Corporate (as opposed to partnerships, LLCs taxed as a pass-through entity or S-corporations) Sellers will be highly resistant to an asset purchase, as it likely will expose them to double-taxation. First, the proceeds of the sale, to the extent there is recognized gain, will be taxed at the corporate level. Then, the proceeds of the sale will be taxed at the shareholder level upon distribution.
Choosing an asset acquisition may require more third party consents than a stock purchase; many more commercial agreements contain anti-assignment clauses than change-in-control provisions. If certain key agreements to the operation of the business have anti-assignment provisions, a Buyer may ask that the Seller get written consent to assign such key contracts before closing the deal. That may necessitate the deal be a "sign and then close" deal – where the Buyer and Seller agree to the terms of the deal but wait a specified period of time to close until certain conditions precedent are satisfied.
This information is intended for informational purposes only. Prior to making any decisions regarding the acquisition of a business, readers should seek the advice of an attorney and tax professional.The publishing of this article does not constitute endorsement, recommendation, or favoring by BizEx.
Alex Prasad, AEGIS Law business attorney, is a contributing author to the BizEx blog. Alex specializes in middle market M&A, as well as working with early-stage and startup companies.
Business Sales Process, How to Buy, How to Sell
