There are essentially three ways how to structure an
acquisition of a company. The primary methods include a statutory merger or
share exchange; purchase of business assets; or purchase of shares from the
existing shareholders. When purchasing assets, the purchaser only buys
specified assets of a business (which may or may not be substantially all
business assets) and specified liabilities (if any at all). When purchasing the
shares, the purchaser buys ownership in the company, including all of its
assets and liabilities. Which method is preferable? Below are some advantages
and disadvantages of each method. Please note that it is essential to involve a
tax lawyer or an accountant in the structuring of the acquisition.
Asset purchase advantages:
• Buyers can purchase only selected assets of the business and not liabilities
to minimize the risk.
• Under Delaware law, sale of all or substantially all assets requires the
majority vote of the target's shareholders and there are no appraisal rights
for shareholders who did not vote in favor of the transaction.
• An asset purchase allows buyers to allocate the purchase price among the
assets to reflect their fair market value. This results in a step-up of tax
basis, allows higher depreciation and amortization deductions, and results in
future tax savings.
Asset purchase disadvantages
• It may be a challenge to define which assets the purchaser wants to acquire.
Usually, businesses sell a subsidiary or a division. So, they typically sell
the assets that are used exclusively or primarily in that subsidiary or
division. However, there may be "shared assets" that would need to be
negotiated, properly licensed to the purchaser, and accounted for in the
• An asset sale typically requires numerous third party consents, approvals
(such as agreeing to substitute a lesee on an office space lease, or consent to
assign a contract, or transfer a permit). The third parties may view the
transaction as an opportunity to renegotiate their contracts, which could delay
the deal and add to the transaction costs.
• If there are any liabilities (disclosed or undisclosed) that the buyer is not
including in the purchase, parties have to make sure that the purchase is not
being made for less than the fair value of the assets and that following the
sale, the company will still be sufficiently capitalized to pay its debts and
liabilities. Otherwise, the transaction may violate fraudulent conveyance laws.
Parties would need to obtain a solvency opinion, which can add to the transaction
• An asset sale is subject to double taxation if the target is a C-corporation,
so it is not advantageous from the perspective of the target's shareholders.
However, this disadvantage disappears if the target is an S-corporation or
another entity with pass-through taxation (LLC, partnership).
Given the challenges associated with an asset purchase transaction, between
2002 and 2009, only 18% of all acquisitions were structured as asset purchases.
In the next post, I'll discuss advantages and disadvantages of a stock
Read more commentary from Arina Shulga on the
legal aspects of operating new and growing businesses at Business Law Post.
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As someone who has been a business broker for 25 years, the statistic that "18% of all acquisitions were structured as asset purchases" has to be regarding large businesses, which is something you should quantify I believe. In smaller transaction (i.e. less than $10.0 million enterprice value), not only is this type of data not published, but from someone who has been on the front lines for a quarter century, the number of stock purchases I have seen versus asset purchases can be no more than one or two percent. I can only recall three actual ones. Your article provides helpful information yet the data would be better served if the size of businesses involved were identified.